Exposed
It was not the Central Bank, the regulatory authority, that first sensed something was off about Probusinessbank’s transactions, but rather Fitch Ratings, one of the “Big Three credit rating agencies.” What these firms are doing is assessing the credit market and assigning scores to the businesses’ solvency potential.
In October 2014, Fitch Ratings voiced concerns about the liquidity of Probusinessbank’s security portfolio. What caught their eye was that the portfolio was being held outside of Russia, was not trading, and had not been refinanced for quite a long while. That was not illegal per se, but that was enough to raise the early suspicions. The agency decided to keep a watchful eye on the bank’s activities.
But even these cautious misgivings of this well-reputed agency means a lot in the finance world. That is when it grabbed the media spotlight and caught the eye of both the customers and the regulatory authority.
Tell us if there’s something we need to know
In late 2014, eyeing potential criminal charges, a top-tier Probusinessbank executive turned into the Central Bank’s mole. He exposed the embezzlement schemes and backed it all up with the official records.
In May 2015, the Central Bank’s oversight department held a briefing. The briefing was intended as a way to signal the launch of a formal inquiry into the case. Probusinessbank was grilled about the alleged embezzlement schemes using Immoger , Ambika, and Vermenda. The officials wanted to know if those companies were affiliated with the bank. The biggest question was whether the assets held with DMBL were in any way encumbered. Guess what the bankers said?
Leontiev: It’s no big deal
On Jun. 8, 2015, Leontiev wrote a letter to the oversight department. According to him, all of the asset encumbrances were detailed in the bank’s financial reports. If some assets were not flagged as encumbered, they were freely available to the bank.
In other words, he maintained the assets were not collateralized and could be used by the bank or even returned to Russia.
In reality, though, most of those assets had already been heisted through the shell firms.
Lomov: It’s no big deal
On July 20, Alexander Lomov , the deputy chairman of the board at Probusinessbank wrote a similar letter where he, too, claimed the money had not been collateralized. It was an active investment with an actual ROI.
But we now know the assets were only transferred to DMBL to be used as collateral for Vermenda’s loan obligations. Most of that money could no longer be recovered, and that truth would soon be revealed.
CB: Update your balance sheet
However, the Central Bank could no longer approach the DMBL-held assets as reliable and fully liquid. The CB ordered a reassessment. Translated from the banking jargon, they raised the assets’ risk status to a much higher score.
Probusinessbank was mandated to requalify the DMBL-held assets as a high-risk investment and ramp up the reserves to cover the potential losses. The regulatory authority demanded that the bank credit a whopping 4.64 billion rubles to its balance sheet.
A scrupulous bank would have simply returned those assets to their Russian accounts, thus proving their liquidity. And the Central Bank would have downgraded the risk status. Alternatively, the bank execs could have had the market value of the DMBL obligations calculated and shown the price at which those could have been sold to a third party. That move would have spared the need to credit the reserve amount.
But Probusinessbank could not do it. DMBL would not have allowed them to withdraw the money as it secured the Vermenda loans. And no third party would have risked purchasing the obligations linked to a shell company.
Delicensed
Under the CB’s decree of Aug. 7, 2015, the Deposit Insurance Agency (ASV) was appointed as Probusinessbank’s temporary administration.
On Aug. 10, the interim top brass mandated that OCIL return the bank’s assets.
In a letter sent on Aug. 11, OCIL declined to transfer the assets, citing them being used as collateral for the discharge of Ambika’s loan obligations. That is when it finally dawned on the ASV and the CB that the bankers had indeed failed to report the encumbrances or, simply put, stolen the deposited money.
On Aug. 12, 2015, the CB revoked Probusinessbank’s license, citing a “high-risk policy with regards to turning the funds into low-quality assets.” That was a very diplomatic way to put it.
Temporary administration bumps into new heist proofs
Probusinessbank’s newly appointed administrators reached out to DMBL to try and recover the assets. DMBL’s reply showed them that the bank had used the money to collateralize Vermenda’s loan obligations.
It followed that, in lieu of $153 million in the DMBL-held assets, Probusinessbank was only entitled to Vermenda’s sham obligations secured by the bank’s former bosses. But Vermenda had zero money or assets to recoup.
Millions of dollars that had been placed with a seemingly reliable foreign brokerage firm vanished into thin air.
Bank’s creditors losing their money
If it had not been about the bank but, say, a private business, the implications would not have been that grim. But the bank was playing with its customers’ money. Part of the sum was insured by the ASV, but it was only true of individual depositors.
The companies and business owners that had accounts with Probusinessbank were stripped of their money down to the last dime. The bank’s insolvency officially affected over 7,600 customers. The new administration had no way of reimbursing those scammed clients. The money had been stolen long before the schemes could be exposed.
In our investigation, we deliberately avoided citing the Russian court rulings, as the Russian justice system is largely compromised and unreliable. Instead, we resorted to the source documents.
But we also got hold of the Russian arbitration court’s ruling that was based on the same records we have used for this investigation. You can check it out, if interested.
Probusinessbank’s customers keep battling it out in courtrooms in a bid to recover the money they have been defrauded of.
On-the-run bankers re-emerge as political dissidents
As soon as Probusinessbank’s license got revoked in August 2015, Leontiev and Zheleznyak were quick to jet out of Russia. Shortly before bowing out, Leontiev posted to his corporate blog, “This country isn’t ready for companies like LIFE. Over the next 50 years, I’ll be doing my thing in some other parts of the globe.”
But the bankers did not take flight because they were a pair of painfully misunderstood and severely underrated visionaries. The real reason was that their embezzlement schemes would have certainly carried criminal charges and lengthy prison sentences. Neither Leontiev nor Zheleznyak wanted to meet their unenviable fate in Russia, and both darted for the fire escape.
Once abroad, the duo instantly began to figure out how to dodge the extradition and retain the scammed money.
Russian Arbitration Courts’ Decisions
Since we have no trust in the Russian justice system, our investigation relies on the source files.
But the Russian arbitration courts also investigated these cases. We believe these two cases were not politically motivated (as can be seen below), and the Russian courts detail the schemes you have read about here.
For the full version of these court rulings, click here.