Want to get rich in Ukraine? Set up a bank.And then destroy it.
That’s what Gulliver skyscraper and Eldorado electronics chain owner Viktor Polishchuk did with the recently collapsed Bank Mikhailovsky.
Polishchuk set up a scheme at Mikhailovsky by which clients could make deposits at high growth rates, but without protection from the Deposit Guarantee Fund.
The millionaire, who is reportedly married to a niece of Russian Prime Minister Dmitry Medvedev’s wife, then used Mikhailovsky to lend to himself in a scheme that continued for months after the National Bank installed an official observer.
As the bank began to collapse, Polishchuk jettisoned the non-guaranteed deposits into Mikhailovsky, creating a situation whereby the government – and Ukraine’s taxpayers – would be legally obliged to take responsibility for his fraud. In so doing, he also aligned his own interests against the government, and with those of the defrauded depositors.
Polishchuk did not reply to numerous requests for comment, made through Gulliver and Eldorado’s press services.
Yanukovych links
Polishchuk founded Mikhailovsky in June 2013, through a shell company called Ekosipan.
Ekosipan is a limited liability company controlled by 11 directors, each with equal shares. The directors include Polishchuk, as well as former Mikhailovsky chairman Igor Doroshenko.
From the moment of the bank’s creation, Doroshenko promoted an aggressive expansion strategy that would see the bank purchase other, smaller banks.
“We’re in the process of reviewing a few banks,” Doroshenko told news agency Minprom in a fall 2014 interview.
But the only attempt that Mikhailovsky ever made to purchase another bank came in March 2015, when the bank applied for – and received – permission from Ukraine’s Anti-Monopoly Committee to purchase the All-Ukrainian Development Bank, owned by ousted President Viktor Yanukovych’s son Oleksandr Yanukovych.
The transaction was later blocked in court.
Antonina Volkotrub, a researcher at the Anti-Corruption Action Center, suspects that Polishchuk was acting as a front for the Yanukovych family.
“I cannot say that Polishchuk is an independent player,” Volkotrub said.
Brazen fraud
At the same time as the attempted purchase, Mikhailovsky was engaged in a brazen fraud that allowed it to multiply its client base while loaning the money back to its owners.
The bank offered a service by which clients could keep money at high growth rates. Instead of being held by the bank itself, the deposits would be held by a separate firm called the Investment Calculation Center. Through an individual investment agreement, the bank promised to pay 25 percent per year interest on the money.
So what’s the catch?
The deposits weren’t insured by the Deposit Guarantee Fund. Though the government gave the Investment Calculation Center permission to take deposits as an investment fund, the depositors did not realize that they were making an investment, and not a bank deposit.
“All the other banks had a lot of problems with providing credit,” said Grigoriy Lukashenko, a pensioner protesting the Deposit Guarantee Fund on June 21 protest, who claimed to have lost more than Hr 100,000 in savings. “It seemed like Mikhailovsky was the best bank.”
The deposits were privately insured, but only via Forte – an insurer that Polishchuk purchased in November 2013, five months after Mikhailovsky’s founding. A call to Forte was met with an automated statement saying that the firm would be unable to pay out losses from the bank’s collapse.
Artem Marinushkin, an attorney representing the clients who lost money in Mikhailovsky, said “these companies, the Investment Resource Center, connected to Polishchuk are, by essence, shell firms.”
As an investment fund, the Investment Calculation Center appears to have “invested” people’s money as deposits into Bank Mikhailovsky.
“It’s a case where the company gathered the money from investors, and then itself put the money into Bank Mikhailovsky as a deposit at a higher interest rate, and earned cash off of it,” Marinushkin added.
Over the course of 2014, as the Ukrainian economy began to tank, Bank Mikhailovsky grew its deposit base 4.5 times to Hr 631 million this way, while the first half of 2015 saw that figure nearly double to total deposits of Hr 1.1 billion.
Minutes from the bank’s board meetings suggest insider lending. In 2014, the bank gave Hr 790 million to a group of companies that appear to be linked to Polishchuk.
One company, for example, is Aleksandriya, which received a loan totaling Hr 131 million from Mikhailovsky. The company is owned by a man named Oleksandr Denisov, who was a co-director of Ekosipan and served on the board of Mikhailovsky.
In another case, Mikhailovsky loaned Hr 130.7 million to a company called Inter-Profit, registered to an address in the Kyiv suburb of Brovary where Polishchuk owns land. A Kyiv court ordered the property seized in October 2015 as part of an investigation into real estate fraud in Brovary.
Overall, during this period Mikhailovsky was lending far more money than it had in deposits.
“It turns out that the philosophy of the business was oriented so that the bank would not be profitable,” said Volkotrub.
Bank run starts as NBU watches
The NBU classified Mikhailovsky as problematic in December 2015. The central bank then sent an official observer into Mikhailovsky to oversee transactions at the institution.
“The official observer has access to all business transactions of the bank, he could follow the flows of money, how everything happened,” said Marinushkin, adding that the NBU would have had to have known of the bank’s schemes starting at least from December.
Installing the official observer also meant that the bank had to agree to a number of restrictions on capital flow and the kinds of loans it could put out.
But at the end of March, the restrictions were lifted.
“Why the NBU lifted these restrictions is not understood,” Volkotrub said. “That’s the main question.”
The lifting of restrictions allegedly allowed the bank’s management to begin to empty the bank’s vaults, so that, in Marinushkin’s words, “the necessary people could remove their assets from the bank.”
NBU Deputy Governor Katerina Rozhkova told the Kyiv Post that the restrictions were lifted part of a “plan of the banks financial recovery.”
Collapse
By May 18, Mikhailovsky was almost out of money. Lines began to form near its ATMs as people tried to take out what they could, while the bank’s leadership instituted a Hr 1,000 withdrawal limit.
But behind the scenes, Polishchuk and others were preparing for the collapse. On the same day, Board chairman Doroshenko resigned.
The next day, Polishchuk sold his 92 percent stake in the company to 12 people, meaning that no owner had more than 10 percent.
The change was apparently done to avoid exposure under a recently passed law that makes bank owners liable for everything that happens in their bank. The National Bank registered the change on its website on May 23, though the bank’s press service said on June 24 that the change occurred “automatically” after the bank uploaded the data.
“Nothing cancels Polishchuk’s responsibility for Mikhailovsky,” an NBU spokeswoman said.
On May 20, amid the run on Mikhailovsky, Investment Calculation Center, the shell company that took people’s deposits, sent a message to its depositors saying that their money had been returned to Mikhailovsky checking accounts.
On the same day, the central bank says, Mikhailovsky’s financial monitoring system was disabled, preventing the NBU observer from seeing the transactions.
When the system was reconnected at the end of the May 20 business day, Mikhailovsky had Hr 1.1 billion more in individual deposits that the Deposit Guarantee Fund had previously had to insure. The bank’s leadership had transferred the fraudulent deposits into Mikhailovsky.
All of a sudden, the burden of the fraud was on the state.
High-level links, similar fraud to come?
Ukrainian government officials argue that the deposits were fraudulently placed into Mikhailovsky, and that the Deposit Guarantee Fund therefore has no responsibility to insure the losses, as they were technically made as investments, and not as deposits.
Those defrauded argue that they made the deposits under the pretense of them belonging to Mikhailovsky, and that even though the money was transferred at the last minute, that does not absolve the fund of its legal responsibility to guarantee the assets.
“The law is on our side,” said Kirill Rostenko, a Mikhailovsky client who came from Kharkiv to protest outside the fund.
The NBU official who has perhaps been the most vocal against insuring the Hr 1.1 billion has been NBU deputy governor Rozhkova, who said that the government would not insure the money.
“The deposit fund is a separate, independent institution,” Marinushkin said. “Rozhkova cannot order them what to do.”
Rozhkova, however, has her own connection to the matter. Before joining the NBU, she worked at Platinum Bank, the institution to which Doroshenko immediately decamped after leaving Mikhailovsky in May.
Rozhkova has denied any conflict of interest surrounding Platinum.
When asked why the NBU did not detect the fraud, Financial Stability Chief Vitaliy Vavryschuk said “you can never guess when management or shareholders will decide to kill the bank.”
A similar scheme to that which underpinned Mikhailovsky’s collapse, by which depositors make investments not guaranteed by the state, also exists in the country’s largest bank, Privatbank. The Dnipro-based bank advertises it as a “Service of Profitable Deposits.” A Privatbank spokesman said that the service has Hr 2 billion in deposits, nearly double what Mikhailovsky had.
Advertising materials given to the Kyiv Post by a clerk at one of Privatbank’s central Kyiv branches did not mention that the deposit is not guaranteed by the state.
Instead, it is insured by Ingosstrakh, a Privatbank-owned company with accounts in the bank.
