Development Bank Gambles to Help Reform Fraud-Ravaged Moldova

  • London-based EBRD doubling stake in nation’s No. 3 lender
  • Ex-Soviet republic still reeling from $1b bank theft in 2014

The European Bank for Reconstruction and Development is doubling down on an investment in Moldova as it seeks to encourage reform in an ex-Soviet banking system that’s been ravaged by fraud.

The London-based lender said Monday it’s raising its holding in VictoriaBank BC, Moldova’s third-biggest bank by assets, to 27.5 percent from 15 percent. While the deal is just 6 million euros ($6.7 million), it has an outsized importance in a country that finds itself torn between Russia and the European Union and destabilized by endemic corruption.

The decision to wade deeper into Moldovan finance proved controversial at the normally conservative EBRD. Questions over VictoriaBank’s ownership underline money-laundering risks as Moldova’s central bank continues to investigate an alleged $1 billion fraud in 2014. The economy is still reeling from the disappearance of that money, which prompted talks with the International Monetary Fund over a bailout.

Ownership Questions

Monday’s transaction “challenged all of our principles and procedures, including the degree of ownership we should hold in any one bank, the control we can exercise and our flexibility in terms of rules on integrity,” Henry Russell, the EBRD’s director of financial institutions for the western Balkans, Belarus, Moldova and Ukraine, said in an interview in London. To take control of governance, the bank would be willing increase its stake to 100 percent, he said.

The last 20 years suggest attempts to trigger a clean-up of Moldova’s financial industry will face high hurdles. Banks missed out on the wave of investment in ex-communist central Europe in the 1990s, instead becoming the preserve of politically connected local and Russian tycoons who often used them to make preferential loans.

The IMF said in a 2014 assessment that as much as 70 percent of Moldova’s financial system was controlled by two business groups. Businessman and former Prime Minister Vlad Filat has been in prison since last year, charged with complicity in the alleged $1 billion fraud. He denies wrongdoing.

Audit Quest

The EBRD bought its initial VictoriaBank shares stake in 1995 for $610,000. It withdrew from the board in 2006 after a company whose ownership structure it deemed unclear bought a controlling stake. That holding was later sold to Cyprus-registered Insidown, whose beneficiary was first listed as a German dentist. Audit company KPMG LLP said it’s unconvinced that Russian businessman Sergey Lobanov, listed as Insidown’s current owner, is the sole beneficiary.

Lobanov didn’t respond to a request for comment. Similar requests to Moldova’s central bank and VictoriaBank also went unanswered.

Russell said the EBRD’s first goal is to access VictoriaBank’s accounts and perform an audit. That could prove difficult as Insidown, which owns 39.2 percent of the bank, hasn’t presented credentials for its three director nominees, a legal requirement for the board to hold regular meetings. The EBRD wants a new central bank chief, in place since April, to force the matter.

‘Forceful Action’

“The biggest benefit for Moldova is that the governor starts to take forceful action to use his regulatory powers,” prompting a virtuous circle throughout the industry, Russell said. “Just as important is that it may signal to markets that Moldova is now an attractive destination for strategic investors.”

Nominally pro-reform governments have also presented obstacles in the past. Moldova last year blocked the EBRD’s plan to buy VictoriaBank shares from the Romanian unit of Greece’s Alpha Bank AE. A new cabinet relented last fall after an angry response from the London-based lender.

Despite concern the nation’s institutions remain captive to private business interests, there’s enough domestic and diplomatic pressure for the EBRD to be able to create its model bank, according to Dumitru Budianschi, a public-sector finance specialist at Moldovan economic researchers Expert-Grup.

“Moldova has become so dependent on external financing that the EBRD is now very powerful here and the government has very little room for maneuver,” he said. “They have a chance.”

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