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Russian bank collapse Fictitious assets, hidden losses and the role of the IFSC

Cillian Doyle reveals how Ireland’s shadow banking sector hid massive losses, triggering one of the most costly bank bailouts in Russian history.

IN NOVEMBER 2016 two of Russia’s largest banks MDM and B&N completed a merger.

The new entity retained the name B&N and it ranked in the top 10 of all Russian banks, based on the size of its assets.

Following the merger CEO, Mikail Shishkhanov, declared: “We have laid the foundation for the creation of an international-class bank.”

But just 10 months later, B&N required a massive bailout in what has become one of the mostly costly rescues in Russian banking history.

Shiskhanov blamed these difficulties on MDM, saying that its losses “turned out to be much more serious than assumed in the conditions of a falling market”.

But how had the regulators who were tasked with assessing MDM prior to the merger failed to recognise the problems in the bank?

The answer lies in Ireland’s so-called shadow banking sector operating out of the International Financial Services Centre (IFSC). The sector has become a key attraction for Russian corporates engaged in off-balance sheet financing, as well as other tax or regulatory avoidance.

Recent research by myself and Trinity Professor Jim Stewart demonstrated that around €110 billion has been raised by Russian-connected, IFSC-based vehicles between the years 2005 and 2016.

But the IFSC is also being used by Russian banks for more questionable purposes, namely the hiding of losses.

The case of MDM bank clearly illustrates how weakly regulated, IFSC-based vehicles were used as part of an insider-dealing scheme which allowed the bank to create fictitious assets on its balance sheet, whilst simultaneously hiding losses.

By providing loans to these off-balance sheet vehicles, who then used the proceeds to purchase some of the bank’s stock of non-performing loans, the appearance of its balance sheet was improved prior to the merger.

So let’s examine this insider-dealing scheme to understand the techniques that were used to conceal what was happening and the effect that had on the bank’s balance sheet.


The Russian Central Bank first approved the merger between the two banks in 2015, but negotiations had been ongoing for several years previous.

Since 2009, MDM had been struggling with a declining asset base and a rising level of non-performing loans. 

After reaching a high-point of $13.3 billion, the size of its total assets went into sharp decline and had fallen to $10.6 billion by the end of 2011. So, with the bank shedding around $1 billion a year in value, a scheme was created to try arrest this decline.

Three IFSC-based vehicles, Amaterasu Finance, Khepri Finance and Grengam Finance, and a fourth located in Malta, Juturna Limited, were used to form an extended corporate services supply chain, that could disguise the bank’s hidden hand in these transactions.

So how exactly did it all work?


 Click here for larger image.

In 2012, MDM bank appears to have lent $401 million to the Maltese company Juturna Limited.

Malta was likely chosen as the first link in this chain, as disclosure requirements in company accounts are minimal with the ‘ultimate beneficial owner’ not required to be on public record. Malta thus acts as the primary secrecy barrier hiding the connection to MDM.

Juturna’s filings to the Maltese registry consisted on a single document, akin to an article of association, which contained no financial information whatsoever. It did however reveal that the international corporate service provider TMF Group were providing trustee and director services, just as they were to the three Irish vehicles.

(Notably one of the TMF directors was also mentioned in the Paradise Papers.) 

The Maltese company upon receiving the loan lent the proceeds to its Irish subsidiary Amaterasu.

Amaterasu then dispersed the funds in almost equal measure to the other two Irish vehicles Khepri and Grengam, both of whom used trust ownership structures to further obscure the relationship with MDM.

Now with a sufficient separation of ownership in place, they purchased the non-performing loans from the bank. Thus, MDM got back the money it had originally lent out but this time in the form of ‘new’ capital, which it received in exchange for the non-performing loans on its books.

Balance sheet implications

From 2009 to 2011, the bank’s assets fell from $13.3 billion to $10.6 billion.

However, this decline was arrested somewhat in 2012 after it made the $401 million loan, therein leveling off at $10.1 billion.

Likewise, the reported loan impairment losses on MDM’s balance sheet which were running at over $351 million in 2011, fell back to $80 million a year later – after the two Irish vehicles purchased the non-performing loans.

However, the scheme – while temporarily improving the appearance of the bank’s balance – could not offset such major problems, which were exacerbated by the crisis in the Russian financial system beginning in 2013.

Thus one year later, the bank’s non-performing loans had risen $539 million with the bank’s assets now shedding around $2.1 billion a year in value, up until its eventual demise.

The non-performing loans purchased by the two Irish vehicles Grengam and Khepri were valued at par at $1.1 billion but declined sharply in value until being written off in 2016. Amaterau’s loan had been written off in 2014. 

In total, these three vehicles reported losses of over $1.4 billion in the period 2012-16. The latest accounts of the Irish vehicles in 2016, states that they are all in the process of being wound up.

Public registries of ownership

The above scheme underscores the need for public registries of beneficial ownership.

MDM bank, through its use of Ireland and Malta, was able to exploit informational asymmetries that allowed it to carry out the above insider transactions.

Public registries of beneficial ownership will help to combat these kinds of dubious off-balance transactions. Ireland has agreed in principle to the creation of such a registry, but it has now delayed its introduction until 2019, with the possibility of further delays.

Until then it’s possible that banks will continue to hide losses in the shadows of the IFSC. 

Cillian Doyle is a doctoral student in Trinity College Dublin, and a member of TASC’s network of economists.

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