Bank failures, especially in emerging markets, tend to have common characteristics that resist the best efforts of regulators.

When asked why he robbed banks, prolific American bank robber Willie Sutton supposedly replied: “Because that is where the money is.” Mr Sutton had the strategy right but not the tactics: lifetime earnings of $2m and half his life behind bars are not a good advertisement for armed robbery. Far better to rob the bank from the inside; better yet manage the bank. However, best of all is to own it.

When you the rob the bank you own, the staff are not likely to shoot at you and the sheriff – or bank regulator – will probably not notice until long after the event, giving you plenty of time to cover your tracks before the inevitable bank failure occurs.

Of course, I am sure that readers of The Banker would not work for those kinds of banks. But the world of international banking is now so vastly interconnected that those kinds of banks will be counterparties, have correspondent banking relationships and might even be strategic partners or potential acquisitions. So it may be worth considering some of the insights that Kroll Advisory Solutions has drawn from working on a series of cases in this area. 

The latest craze

Kroll Advisory Solutions has conducted major forensic investigations of failed banks in Iceland, Ireland, Bahrain and Afghanistan on behalf of the receiver or the authorities. We have had a smaller role in bank failures in two other Western countries and one eastern European country, as well as dozens of cases where the subject has touched on fraud associated with a bank failure. We are regular visitors to the banking morgue.

There are some common characteristics to these bank failures. The location is usually a small country with a 'hot' economy. Small countries have limited regulatory capacity, are often under-resourced and inexperienced. So-called hot economies attract fast money, enthusiastic dealmakers and aggressive entrepreneurs, who start or buy a local bank.

When I was visiting our offices in Asia in mid-2011, I suggested this pattern might emerge there – perhaps Vietnam might fit the profile.  Wrong, said the local experts (not ours): the 1998 banking collapse cleaned up the system and sharpened the regulators’ teeth. But, 12 months later, problems began to surface.

The entrepreneur who has the bright idea of starting a bank – or buying a sleepy local institution – often starts with no malign intent beyond supporting his own activities and making a good investment; the malignancy comes later. The dealmakers help fund the bank from wholesale markets, sometimes from savvy investors who sense that it is a Ponzi scheme but who expect to get out before the collapse. The infrastructure required – the systems, the software, even the staff – can be bought off the shelf and will make the bank look like a sophisticated modern institution. They will usually be located on high floors of the tallest building in town.

Things may go wrong quickly, because the owner cannot resist the temptation; or issues may only arise when the entrepreneur’s other investments begin to have problems.  

Related party lending

Fraud can take many different forms. At its simplest, we have seen bank funds wired to Las Vegas to cover directors’ gaming losses. Slightly more sophisticated is related party lending with inadequate collateral, perhaps lightly disguised by routing the money through an offshore jurisdiction (especially when it involves a capital increase for the bank itself). Cleverer still is lending to your friend with an understanding that his bank will lend to your companies. None of this is rocket science, but doubtless rocket science, or derivative trading as bankers call it, will figure in the next wave of failures.

Our role in investigating these bank failures is to identify improper or fraudulent actions, not simply with a view to identifying the guilty (that is the 'sheriff’s' job, not 'hired guns' like us) but to help recover the money. The obvious culprit is often likely to be the owner, together with his cronies inside and outside the bank. This requires painstaking reconstruction of loan files (which may well have been filleted or tampered with), proper investigation of borrowers and counterparties and a nose for how these things really work and what was really going on – often quite different from the way things look on the surface. 

Achieving recoveries, through negotiation or litigation, will almost always go beyond the local jurisdiction, and so the evidence will need to meet international standards. Putting together a case that will hold water in a London or New York court requires an understanding both of the local context and practices, and of UK or US rules of evidence.

Chasing the former bank owner is generally not enough; the chances are that his other problems will have dented his net worth substantially. This is where those interbank relationships may create new headaches: careless bankers and their advisers may find themselves in the frame as perhaps unwitting accomplices to the crime. Deep pockets will always attract a multitude of claimants.

Tommy Helsby is chairman of Kroll Advisory Solutions for Eurasia.


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