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WorldJuly 1 2014

Crackdown on opaque ownership of Moldovan banks

The problems faced by Moldova's banking sector are not performance related, but instead are deeply rooted in a lack of transparency in banks’ shareholder structures. After opaque shareholder changes in the country's two largest banks in 2013, authorities are working on a resolution.
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Boasting an inherently profitable banking sector, the Moldovan market is not troubled by some of the typical banking concerns seen elsewhere in the world, such as overzealous lending activities, which outpace deposits, hits from foreign currency lending or a too-high non-performing loan (NPL) book.

Indeed, the average return on equity across the country’s 14 banks was 9.4% in 2013, the loan-to-deposit ratio is below 100% and most foreign currency lending to individuals is forbidden. The rate of bad loans, while higher than in many western European countries, is still below others in the central and eastern Europe region at 11.6% at the end of 2013.

Moldova Agroindbank, the country’s largest bank by loans and deposits, boasted 14.4% return on equity in 2013, on NPLs of 6%, according to Serghei Cebotari, chairman of the board at the bank.

Still, Moldova’s banking sector has to deal with a 23-year-old problem, and it lies at the heart of its institutions.

Identifying the problem

“The overall issue regarding the transparency in the shareholder structures of our banks is not a new problem but has accumulated in size during the development of our banking sector,” says Dorin Drăguţanu, the governor of the National Bank of Moldova (NBM). “In the past, shareholders were registered in classical offshore jurisdictions but changes made to the Law on Financial Institutions a few years ago put a ban to that. The new strategy of those smart guys is to use shell companies registered in good jurisdictions – including from the EU – where the ultimate beneficiary remains unknown.”

In many other eastern European countries, foreign banks hold a significant majority of the banking sector, says Henry Russell, director of financial institutions groups, western Balkans, Belarus, Moldova and Ukraine at the European Bank for Reconstruction and Development (EBRD), while in Moldova only four are subsidiaries of foreign institutions.

“When foreign investors came [into other eastern European countries] they also brought in best practices,” says Mr Russell. “But if you can’t trust the courts to uphold your property rights, you are not likely to attract foreign investors. [It is this] reputation that Moldova has to improve.”

Together with the EBRD, the International Monetary Fund and the World Bank, the Moldovan government has worked on several projects to tackle corruption and improve transparency in its banking sector in the past years. In July 2013, Moldova established an economic advisory body, the Economic Council, chaired by prime minister Iurie Leancă, which is aimed at attracting investment, while improving the business environment and the rule of law. And while Moldova’s rank in the World Bank Doing Business report has improved from 86th place in 2013 to 78th in 2014, the country’s rank for investor protection remained unchanged at 80th in the world.

Who owns what?

Despite reforms and numerous amendments to the Law on Financial Institutions, the largest two Moldovan banks, Moldova Agroindbank and Victoriabank, were subject to several opaque ownership transfers starting in early 2013, which in the case of Victoriabank amounted to about 30% of its shares.

The transactions in Victoriabank shares were made in small chunks of below 5% of the bank’s share capital, which did not require the new owners to disclose their identity or ask the National Bank for permission. However, the Law on Financial Institutions also prohibits shareholders to act in concert and, if found out, the NBM can block these shareholders’ voting rights.

“Our experts were attending Victoriabank’s shareholder meeting in October [2013] and witnessed a clear fight between old and new shareholders,” says Mr Drăguţanu. “Companies from different countries were trying to push through ideas, which were almost identical. This was the ultimate trigger to understand that there was a group of new shareholders, all of whom with holdings below 5%, which were suddenly trying to completely change the management of the bank.”

By early 2014, the NBM had collected significant evidence – if someone was to challenge its decision in court – to suspend all rights of these shares and request the shareholders in question to dispose of their shares in 60 days. All of them, including the ones who took the NBM to court, sold their shares in April 2014, but that left the NBM with new names to investigate.

“We still believe that the ultimate official most probably did not change,” says Mr Drăguţanu, “but we need to be very careful and have a reasonable volume of evidence before we take a decision on it because the litigation risk is pretty high.”

The NBM also holds suspicions that the ultimate beneficiary of some share transactions in Agroindbank was not properly disclosed and is in the process of collecting information to clarify the situation.

“The NBM has established a number of specialised reports that are submitted by the banks and Moldova Agroindbank strictly complies with these provisions,” says Mr Cebotari. “Also, according to amendments to the legislation on financial institutions in effect since 2013, the NBM may request any information it deems necessary directly from the shareholders, thus having all the necessary tools to determine holders of shares and final beneficiaries.”

The mega-regulator idea

“In the case of Victoriabank, the NBM has demonstrated courage and willingness to clamp down on opaque shareholder changes,” says Julia Otto, head of the EBRD’s Chisinau office. “Yet when the voting rights of those minority shareholders were revoked, the raiders used the split of responsibility between the two regulators [the NBM and the National Commission for Financial Markets, or NCFM] in their favour.”

While the NBM can impose sanctions, it cannot stop any further transactions being done with the shares, as this is the NCFM's responsibility. “There is a need to consolidate regulatory responsibilities under one umbrella to close the loophole,” says Ms Otto, “but this is a large legislative act.”

The NBM is open to these reform ideas. Indeed, Mr Drăguţanu argues that consolidation would make market supervision easier, and would allow for a central budget for the hiring of staff and for investment in better infrastructure.

“The NCFM should be reorganised, so that the NBM deals with the regulatory work and supervision, while the new NCFM covers general business conduct issues,” says Mr Drăguţanu. The topic, however, is not on the political agenda — especially not before a looming parliamentary election in November this year.

“Supervising financial markets is one thing; maintaining the stability of the financial sector is quite different,” says Dumitru Alaiba, head of the secretariat to the prime minister’s Economic Council in Moldova. “Although not presently on the government’s agenda, perhaps a mega-regulator is a great idea, but at the moment we have much more urgent needs to ensure transparency and competition in our banking system, and both the NCFM as well as the NBM have substantial possibilities to improve the situation under the present legal framework. This is not to say our legislation does not need improvement, yet it has to be a process that will run in parallel.”

More amendments

Following discussions in Moldova’s National Committee for Financial Stability – a consultative body uniting the ministers of finance and economy, as well as the governors of the NBM and the NCFM, the commission in the parliament and the prime minister – the government has approved a draft law, which would bring further amendments to the Law on Financial Institutions. The amendments, which will be voted on in July, would lower the shareholding threshold, above which a holder has to get approval by the NBM, from 5% to 1%.

“The rationale is that this would make intransparent operations harder and more expensive,” says Mr Alaiba. “For one bank alone, you would need to maintain five times more shell companies [to hold 5% of the shares under new provisions]. They cost money and take more resources to coordinate, and it would be easier for the National Bank to prove that a set of shareholders is acting in concert.”

Other amendments would make pledges of bank shares illegal and introduce penalties if bank managers do not comply with the NBM. Mr Alaiba expects that, once the planned changes are implemented, the NBM will be able to determine the identity of the holders of 2013’s stake acquisitions in Victoriabank and Agroindbank in 2015.

Shareholder registers

Yet another issue raised by international financial institutions (IFIs) including the World Bank and the EBRD is the ownership of shareholder registers in Moldova. The registers are held by private limited liability companies, some of which are thought to be controlled by the same individuals that are suspected to be involved in opaque holdings in banks, according to Mr Russell.

In addition to that, most registers rely on basic technology and even keep highly confidential ownership data on a paper basis, according to Mr Drăguţanu, which poses the risk of records disappearing. Still, he says, there is little political support for reform.

This situation should have changed in 2012, when a law was drafted with the World Bank. But in the finally approved draft, the paragraph related to a transfer of share registry tasks to a state-owned regulator had been excluded from the legislative package, according to Ms Otto.

The issue is being addressed by the national authorities with the help of IFIs. One idea, suggested by Mr Drăguţanu, is to create a single securities depositary in Moldova, which would keep ownership records and would ensure the security of transfer of ownership.

“We [have seen] over the past years that groups of independent shareholder registers were used in various disputes among shareholders,” he says. “Some people are saying you need to send an army to get access to a shareholder register. If you cannot protect the ownership rights in a free-market economy, you don’t have a free-market economy.”

Closer EU ties

IFIs in particular take the above points very seriously. The EBRD, for example, has discontinued its co-operation with locally owned banks to stress the importance of the reforms, according to Mr Russell.

“Obviously banks have enough resources and liquidity, [so it] is not a problem in the market for the moment,” says Mr Cebotari. “Nevertheless, the EBRD funding cut in locally owned banks does have a negative effect on performances due to the maturity gap – local resources are predominantly short term. This creates difficulties for banks in financing medium- and long-term projects necessary for economy development.”

Moldova is also on a path to signing a deep comprehensive free-trade area [DCFTA] agreement with the EU. “Consequently, [Moldovan banks] need not only to commit to certain good practices, but should also take steps to make them happen. The introduction of Western standards of corporate governance and effective regulation is a constant point of our policy dialogue with the government,” says Mr Russell. The association agreement enacting the DCFTA with the EU was due to be signed on June 27.

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