Research by the investigative firm of Kroll Associates indicates that the Ukraine's PrivatBank was subjected to a large-scale and co-ordinated fraud over a period of at least ten years which resulted in the bank suffering staggering losses.

The National Bank of the Ukraine, which accepted Kroll's report this week, explains how fraudsters conducted their frauds at the bank in the following manner.

1. Developing and providing new products and services to create the visibility of a real bank to attract funds from private and commercial depositors. The bank employees stated that the bank was like a “vacuum cleaner”.

2. Providing loans to the companies related to the former shareholders and supporting of the loan recycling scheme – repayment of old loans provided to parties related to the former shareholders and their affiliates through the issuing of new loans to other parties related to the former shareholders and their affiliates, which in turn were repaid by further loans.

3. Disguising of flow of funds through dozens of internal transactions which demonstrated the characteristics of a large-scale co-ordinated money laundering scheme, including the rapid
and arbitrary split then re-joining of funds between multiple related accounts, multiple movements between accounts at the bank.

4. Withdrawing these funds for the benefit of the former shareholders and their affiliates.

The regulator ends by saying that the bank was subjected to a large co-ordinated money laundering scheme and a fraud that resembled a pyramid scheme.

How they concealed the frauds

The maintenance and growth of the fraud scheme was accomplished by the issuance of large numbers of new loans, with the fraudsters disguising the flow of funds from the loans through numerous rapid and repeated transfers of funds through multiple linked company accounts, and repaying the principal and interest of old related-party loans using the proceeds of new loans (known as a recycling scheme) to parties related to former shareholders and their affiliates. 73% of the total movement of funds into corporate accounts at the key bank’s overseas unit were internal movements, which were done to conceal the loan recycling scheme and disguise the flow of funds. 92% of loans in this overseas unit were issued to only 50 borrowers. More than half the value of these internal movements occurred between only 20 companies (out of around 3,000 customers). 90% of loans in the Ukraine were issued to 10% of corporate borrowers. Kroll identified many common characteristics of money laundering, notably placement, multiple layering and integration. Many transactions occurred in a short time with no clear purpose.

How they co-ordinated the fraud

Central to the co-ordination of the fraudulent scheme was a shadow banking structure in the bank's main Ukrainian office under the direction of the former ultimate beneficial owners, described by the bank’s employees as "the bank within the bank." This secretive structure had the following functions:

•  to create and/or control a network of companies, which directly or indirectly were controlled by the former shareholders and their affiliates, a major part of which were not recognized by the bank as related parties;
•  to provide financing services to the aforementioned companies;
•  to structure deals between customers to disguise the true nature and destination of funds, including the preparation (creation) of documents on behalf of those customers;
•  to administer the portfolio of related-party borrowers;
•  to present the façade of an ordinary customer-loving bank;
•  to find out when loans to shareholders and their affiliates were due for payment and then to initiate new loans to repay the old ones;
•  to co-ordinate and support the loan-recycling scheme;
•  to help the related parties by-pass their legislative duties; and
•  to make repeated false representations about the bank’s financial position.

The regulator alleges that there were multiple instances of banking fraud and false accounting by the former managers and directors of the bank under the direction of the former shareholders, for the benefit of the former shareholders and their affiliates. Despite this, the accounts of the bank received a clean bill of health from the auditors for all years between 2007 and 2014. PrivatBank had to pay a money-laundering fine to the Latvian regulator in 2015.