When Michael Eggleton arrived in Almaty, Kazakhstan, in 2009 to take over as chief executive officer of Eurasian Bank, he knew something drastic had to be done to repair the lender’s image. The bank, Kazakhstan’s 10th largest, was losing money, and Eggleton’s predecessor had been arrested on suspicion of embezzlement in connection with $1.1 billion in losses at Almaty-based Alliance Bank, which he led from 2002 to 2007. (He was later convicted.) Three other Kazakhstan lenders had just defaulted on a total of about $20 billion in debt. So Eggleton flew a polygraph machine into the Central Asian country. “We had just come through one of the biggest economic crises in the world, and I had just arrived in a new country,” says Eggleton , 44, a former Merrill Lynch (BAC) and Credit Suisse (CS) banker who was born in the U.S. “There was no confidence in the banks. I was trying to address concerns of the market.”
Kazakhstan, with about 3 percent of the world’s proven oil reserves and 1 percent of its gas, ranks 133rd out of 176 nations on Transparency International’s 2012 Corruption Perceptions Index, behind Uganda and Nicaragua. Graft is pervasive in banking, with every seventh borrower paying a bribe to secure a loan, according to a poll conducted last year by Sange Research Center in Almaty. Eurasian Bank’s owners, Alexander Machkevitch, Alijan Ibragimov, and Patokh Chodiev, also control London-based mining company Eurasian Natural Resources Corp. (EURNY), which is under investigation by the U.K.’s Serious Fraud Office for alleged bribery in Kazakhstan and the Democratic Republic of Congo. The company said in August that it will “cooperate fully” with the probe.
The use of a polygraph has led to a drop in theft, including kickbacks for lending, says Eggleton, who declines to provide figures. He started using the device routinely in January 2010. Although the annual test is voluntary, employees who refuse to take it aren’t eligible for bonuses or promotions, he says. “I have a problem with someone who has failed the test or who won’t take it and is making decisions worth millions and millions of dollars,” says the CEO, who submits himself to a polygraph exam once a year. “If they are not taking it, that’s fine and I won’t be penalizing them, but I won’t be making them chairman of a credit committee.”
More than 600 people left Eurasian Bank the first year the lie detector was in use, reducing the number of employees to 2,010, a company spokesman wrote in an e-mail. Its workforce now numbers more than 5,700. Members of Eurasian Bank’s management board, branch heads, and executives on credit and procurement committees are asked to take the test. The bank is highlighting its crime-busting tool in marketing materials for a planned $300 million Eurobond sale this year, says Eggleton. The bank was the third-least corrupt among 24 commercial lenders in the February 2012 Sange poll, which asked 500 Kazakhstan businessmen and mortgage borrowers whether bank employees had sought payments to facilitate credit.
“A polygraph is an extreme measure, but large global institutional investors that we talk to are increasingly concerned about the effects of bribery on businesses, especially in frontier markets like Kazakhstan, where corruption is a serious problem,” says Hugh Wheelan, managing editor of Paris-based Responsible Investor magazine.
Kazkommertsbank, the country’s biggest by assets, began testing some employees in 2003. The practice was introduced by former law enforcement officers, according to spokesman Sergey Chikin, who says the exams are used “to control and improve the bank’s processes as well as a preventive measure.” The Kazakhstan unit of Russia’s largest lender, Sberbank (SBER:RU), began polygraph testing last year, says a spokeswoman. Among the country’s six biggest banks, only Halyk Savings Bank and ATF Bank don’t use or have any plans to introduce lie-detector tests. “As is well-known, the polygraph is not a perfect system, and there are often cases of mistakes,” Vyacheslav Abramov, a spokesman for ATF Bank, wrote in an e-mail.
Eggleton says the tests are 80 percent accurate. He adds that he hadn’t been aware that Kazkommertsbank was using a polygraph when he began the program. “It was one of the ideas I had seen from TV serials, and I had heard examples of it used in companies and banks but not as an actual systematic practice,” Eggleton says. “It’s like having a video camera, which offers a bit of protection.”
The U.S. banned private employers from forcing workers to take polygraph exams in 1988 because of the tests’ unreliability. In Kazakhstan, a polygraph can be used if the employee agrees and if questions don’t involve religious or political matters or inquire about membership in organizations such as trade unions, according to the Prosecutor General’s Office. The answers don’t have any legal force, a spokesman for the office said by e-mail.
The bank’s financial results have improved under Eggleton, and Standard & Poor’s (MHFI) on July 16 upgraded the bank’s outlook to “positive” from “negative,” citing improved profitability, capital, and market share. The polygraph was not a factor in the rating change, says Annette Ess, a Frankfurt-based credit analyst at S&P. “We are aware of the use of the lie-detector machine, and we think its impact is marginal,” she says. “We will only see its effects in a few years when existing loans mature.”