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    Case Study of The Moldovan Bank Fraud

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    Momina Tariq
    This case study examines a large bank fraud that occurred in Moldova between 2012-2015. Three banks were taken over by an offshore holding company, which then used several schemes to extract money from the banking system, including through money laundering. While the Central Bank of Moldova failed to intervene early due to its non-interventionist approach and lack of regulatory tools, early intervention may not have fully prevented the fraud due to its complex nature. The case highlights the need for stronger bank regulation, transparency into ownership structures, and a more proactive approach to financial monitoring.

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    Case Study of The Moldovan Bank Fraud

    Uploaded by

    Momina Tariq
    65 views20 pages
    This case study examines a large bank fraud that occurred in Moldova between 2012-2015. Three banks were taken over by an offshore holding company, which then used several schemes to extract money from the banking system, including through money laundering. While the Central Bank of Moldova failed to intervene early due to its non-interventionist approach and lack of regulatory tools, early intervention may not have fully prevented the fraud due to its complex nature. The case highlights the need for stronger bank regulation, transparency into ownership structures, and a more proactive approach to financial monitoring.

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    CASE STUDY OF THE MOLDOVAN BANK FRAUD

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    This case study examines a large bank fraud that occurred in Moldova between 2012-2015. Three banks were taken over by an offshore holding company, which then used several schemes to extract money from the banking system, including through money laundering. While the Central Bank of Moldova failed to intervene early due to its non-interventionist approach and lack of regulatory tools, early intervention may not have fully prevented the fraud due to its complex nature. The case highlights the need for stronger bank regulation, transparency into ownership structures, and a more proactive approach to financial monitoring.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    65 views20 pages

    Case Study of The Moldovan Bank Fraud

    Uploaded by

    Momina Tariq
    This case study examines a large bank fraud that occurred in Moldova between 2012-2015. Three banks were taken over by an offshore holding company, which then used several schemes to extract money from the banking system, including through money laundering. While the Central Bank of Moldova failed to intervene early due to its non-interventionist approach and lack of regulatory tools, early intervention may not have fully prevented the fraud due to its complex nature. The case highlights the need for stronger bank regulation, transparency into ownership structures, and a more proactive approach to financial monitoring.

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    The presentation discusses a major banking fraud that occurred in Moldova between 2012-2015, where three banks were taken over and billions of dollars were laundered out of the country through complex schemes.

    Before the fraud, Moldova had a struggling economy and its banking system was underregulated. The 14 banks had little capital buffers and the central bank had a non-interventionist approach.

    The fraud schemes unfolded in two phases - first, three banks were acquired between 2012-2013. Then from 2014-2015, complex financial product and money laundering schemes were used to extract liquidity and prevent regulatory scrutiny.

    CASE STUDY OF THE

    MOLDOVAN BANK FRAUD

    I S E A R L Y IN T E R VE N T I O N T H E
    B E S T C E N T RA L BA N K
    S T R A T EG Y T O A VO ID
    FI N A N C I A L C R I S E S ?

    Presented by
    QASIM MEHMOOD
    Introduction

     “fraud” definition.
     Categories of bank frauds:
     credit card and other financial instrument fraud
     money laundering
     electronic services fraud
     identity theft

     Central Bank role ( regulation, aimed at limiting takeovers and


    limiting market monopolization, prevent unlawful operations )
     The Moldovan case presents particular interest.
     In this case, the banks themselves are the victim of the fraud.
    The Moldovan economic context before the fraud

     In 2011, Moldova (Europe’s poorest countries in terms of its


    GDP)
     The sources of growth were drying up.
     Moldovan economy came into recession in 2012.
     Growth resuming in 2013 with ease of monetary policy.
     Moldova is a small, open economy having tight economic
    and financial links with the EU.
     Banking sector fraud culminated in 2015.
    The Moldovan economic context before the fraud

     Moldovan banking system comprised of 14 banks one,


    state-controlled (one of the three banks targeted by the
    fraud).
     In 2011, inflation increase
     monetary policy was adjusted to increasing interest rates
     lending decreased.
     No tradition of maintaining excess buffers in local banks
    to protect against the risk.
     “Non-interventionist” Central Bank may have not felt the
    need for such buffers.
    Understanding the specifics of Moldovan prudential regulation and
    supervision

     Responsibility of CB (monetary policy and prudential


    regulation and supervision).
     CB follow two objectives: inflation targeting & financial
    stability.
     This regulatory set-up implies that the Central Bank is
    slower to react to financial crises.
     CB also bails out troubled institutions.
     Off shore entities, in this case.
    Understanding the specifics of Moldovan prudential regulation and
    supervision

     The main prudential indicators (the Capital Adequacy


    Ratio; “Large” Exposures; Long Term Liquidity Ratio;
    Short Term Liquidity Ratio)
     In Moldova, Central Bank didn’t have any given set of
    intervention methods.
     In theory, the Central Bank is authorized to act immediately
    if any prudential indicator rises above or falls below its
    acceptable value.
    Unraveling the schemes that led to the crisis

    Moldovan banking fraud was a carefully 4 year


    planned process.
    Success relied on : bank’s ownership structure and
    its products.
     The process unfolded in two phases.
    Acquiring control over three banks 2012 – 2013

     Three financial institutions were taken over by the entity


    called “the Holding Company”.
     In each of the cases, the financial institution was acquired
    by small local firms having no apparent connections.
     Later Central Bank investigations found that purchases
    were financed from the same sources.
     Shareholder structure in two of three banks changed.
    Acquiring control over three banks 2012 – 2013

     The third bank, the largest one, state had a majority stake
    of 56.1%, had liquidity shortfall
     Solution : privatize the bank by means of issuing new
    shares, left with 33.3% stake .
     This made the smaller firm the bank’s new majority
    shareholder.
    Ownership Structure of the Holding Company and Financing of
    Bank Share Purchases

    To finance the share purchase, the Holding Company instructed a number of off-shore firms owned
    by itself to wire funds through non-OECD banks to the off-shore entities that directly controlled the
    Moldovan firms which utilized the money to purchase shares in the three Moldovan bank.
    Financial product fraud and money laundering 2014 – 2015

    The objectives behind the fraud schemes were to:

     Maximization of liquidity for banks to lend to controlled firms


     prevent prudential indicators from deteriorating to avoid
    supervision from the Central Bank
     extract money from the Moldovan financial system by
    laundering it to non-OECD banks
    1st scheme (Cession of Loan Portfolio to an Investment Vehicle)
    2nd Scheme (Loan Shifting)

    Money is secretly transferred through Off-Shore entities to another


    controlled firm which needs to pay back a previously obtained loan.
    3rd scheme (Circular Bank Deposit Scheme)

    A bank places a deposit at another bank which is used as collateral to borrow


    from the second, or potentially a third bank.
    4th scheme (Inter bank market)
    Discussion of the findings
    Discussion of the findings

     To discuss the intervention decision of the Central Bank,


     degradation of prudential indicators does not occur simultaneously, so
    immediate intervention was suboptimal.
     “early” intervention would lead the Central Bank to take control of
    controlled Bank 3 at period 7 after the beginning of the fraud scheme.
     This would alert the Holding Company and would cause the holding to
    extract all possible liquidity from the remaining banks.
    Discussion of the findings

     The decision of not intervening was also due to– the Central Bank: -
     didn’t have “early-warning” system
     cannot obtain information regarding the ownership structure
     no regulatory provisions
     non-interventionist by nature
     The performance of the Central Bank: suboptimal
     Legislative changes, with increased cooperation at the international
    level are needed to identify the ownership structure of Moldovan banks.
     The Central Bank must also become more proactive in monitoring the
    financial situation.
     To do so it needs additional tools and measures to facilitate work.
    Concluding Remarks

     Inadequacy of the Central Bank’s response to the crisis


     Policy of non-interventionism that led to significant losses.
     Regulatory weaknesses that allowed the fraud to take place.
     the regulatory institution did have an opportunity to intervene.
     The Central Bank failed , because of the lack of adequate measures.
     Recommendation
     strong regulatory framework.
     more transparency
    THANK YOU.

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