Senior Analyst at NRA Egor Ivanov
The Central Bank continues its policy of cleaning-up the banking sector from various schemes and enhancing the transparency of banking operations. The regulator intends to continue to closely monitor banks' assets located abroad (including the accounts in non-resident banks, securities in foreign depositories, letters of credit). What techniques are now being used by unscrupulous banks to conduct illegal operations?
Correspondent accounts in non-resident banks
Significant balances placed in non-resident banks, in the absence of corresponding turnover, may indicate their urgent nature. For example, this may be the funds placed as a 'guarantee deposit' on abroad operations of the bank's shareholders. Also quite common is a circuit filling of bank's capital with subordinated deposits granted by non-resident companies, when funds 'return' to the lender through a chain of intermediaries. In addition to these cases, it is common to place funds in correspondent account of subsidiary/parent banks, for which they are a source of funding. In this case, funds on a correspondent account could not be considered a liquid asset, because return of these funds in the short term is impossible, but they continue to be considered as part of highly liquid assets and are used in the calculation of prudential liquidity ratios. The Central Bank will pursue an adequate display of funds placed on correspondent accounts, and it is not an empty phrase: in banking practice there are examples when the regulator recommended credit institutions to take into account certain funds in the calculation of ratios on a date other than this specified in the contract. Therefore, banks that can attract the attention of the regulator in this regard should calculate the risks in case of received recommendations.
It should be understood that a large amount of currency on accounts of non-resident banks is not necessarily a scheme, often there are cases when a bank gets a considerable amount of currency on customer's account in the short term, and the credit institution is unable to profitably place these funds on the interbank market or in short foreign currency loans. Also, one should not forget about the N1 standard – banks with a small value of the mandatory standard of capital adequacy may violate it when deriving funds from correspondent accounts in non-resident banks and placing these funds in the Russian jurisdiction. At the same time, there may be cases when a bank accumulates foreign currency liquidity, if in the near future there will be a large repayment of foreign currency liabilities. Thus, each case needs an individual approach, and the regulator certainly has the right to ask about the economic practicability of placing significant residues without any movement for a long period of time.
Holding securities in foreign depositories
The Central Bank is much more concerned with securities. Over the years, the regulator struggles with a variety of schemes in which they are used. The most straightforward scheme was used by the banks of Matvey Urin, when securities were simply 'drawn' on the balance sheet and confirmed with fictitious extracts from depositories. After this incident, the Central Bank has significantly strengthened the requirements to depositaries.
In the case of Probusinessbank was probably used the following scheme: securities belonged to other owners and were transferred through non-cash transactions to the bank for a period of time (on the dates of preparation of extracts from the depository), then the transactions could for formal reasons be recognized as invalid, and the securities returned to the actual owners. Formally, actions of the depository and securities holders were legal, violations were made by the bank, which hided behind this scheme of assets withdrawal.
Currently, the Bank of Russia's Statement № 2732-U dated November 17, 2011, defines the criteria for depositories in which banks can hold securities, which significantly reduces the risks, but makes no guarantee of preventing the repetition of described schemes, given the presence in the Statement of rather controversial criteria. Questions about beneficial owners of securities and/or the quality of formed portfolio may occur during periods of liquidity deficit in the market, when the funds are attracted through all sorts of mechanisms, except for – it would seem – logical using of securities portfolio.
Trade financing of export and import operations
The regulator started to fight with fictitious export and import operations quite a long time ago. Still known the scheme for capital withdrawal from Russia through fictitious import from the countries of the Customs Union (Belarus and Kazakhstan). Then, in 2012, the volume of these transactions amounted to more than $25 million. Nowadays, credit institutions are quite serious about tracking transactions that fall under the control of Rosfinmonitoring, but a fictitious import is still one of the main ways of capital withdrawal from the country, and the strengthening of supervision in this area is crucial. Separately, one can note the so-called 'Moldovan scheme' in 2014, when via falsified court orders, issued by the Moldovan district courts, had been withdrawn from Russia more than 700 billion rubles in 4 years. According to law enforcement agencies, 19 Russian banks were involved in this scheme, many of which have already lost their licenses.
The next step of the Central Bank in the fight against legalization and capital withdrawal became the mailing of lists of 'suspicious customers' to the largest banks. This mailing is useful: large banks may 'lose' from view illegal operations due to the large total amount of transactions. It should be noted that if earlier the Central Bank recommended to refuse to maintain doubtful customers, now we are talking about closing of already opened accounts.
Will the water find a hole?
The Central Bank of Russia's intensification in different areas is a forced measure and is associated with the constant improvement of schemes for legalization and capital withdrawal. On the other hand, the stricter control of the Central Bank, the more sophisticated schemes of assets withdrawal there are. It is obvious that the cause of capital flight is not the lack of control (although, of course, everything should be put in order), but institutional factors (level of trust of the business to government, judicial independence, the pressure of law enforcement agencies, the rigidity of regulation, etc.) and macroeconomic factors (exchange rate, interest rates risk, external debts of banks and companies).
In the 3Q of 2015 the Central Bank of Russia finally noted a change in sign of the movement of private capital: net inflow of capital of banks and companies amounted to $5.3 billion via the balance sheet methodology. What worrying is that all this inflow in fact went semi-legal – in the field of 'net errors and omissions' ($7.1 billion). The capital returned home, but through the 'back door'. What proportion of this change of trend is due to the increased regulation by the Central Bank and the anti-offshore law (as well as the minimum of payments on the foreign debt), and what – due to the worsening of economic situation in the country (the capital is needed within the country), the future will show. If private capital is willing to leave the country, no strict regulatory measures would be able to hold it back. The water will find a hole.
Profile, 07/12/2015. Pages 38-45.