Family business bankrupted Novokuznetsk Municipal Bank
On December 15, 2016, the Central District Court of Novokuznetsk has started hearings of a criminal case against Aleksander Pavlov, the ex-Director of the sadly remembered Novokuznetsk Municipal Bank. He is charged with embezzlement of more than 1 billion rubles from bank clients and over 3 billion rubles from the bank itself – which has ultimately resulted in the bankruptcy of a major regional bank.
The court has not commenced the hearings yet – the defendants brought a motion to recuse judge Oksana Treshetkina and the entire constitution of the court. Pavlov explained that he can’t rule out that the judges could be clients of the Novokuznetsk Municipal Bank: “as clients, they could have sustained losses, and their decisions might be biased”. Therefore, he insisted to transfer the case examination from Novokuznetsk to Kemerovo where any prejudice would be excluded. But the court has dismissed the motion because no circumstances preventing the judges from participation in the criminal proceedings had been found.
To refresh background: Aleksander Pavlov has been charged under part 1 of Article 201 (Abuse of Authority, which has involved grave consequences) and part 4 of Article 160 of the Criminal Code of the Russian Federation (Misappropriation or Embezzlement on an especially large scale). Each offence is punishable by deprivation of liberty for a term of up to ten years. Pavlov is accused of embezzlement of more than 1 billion rubles from bank clients and over 3 billion rubles of bank’s own funds – which has ultimately resulted in the bankruptcy of a major regional bank.
The Novokuznetsk Municipal Bank Joint Stock Commercial Bank Open Joint Stock Company had been established in 1994. It was the 210th largest bank in Russia by its asset value. It had over 120 thousand clients keeping 10.4 billion rubles on its accounts. In 2001, Yuzhkuzbassstroy Construction Company has become the principal shareholder of the bank. Yuzhkuzbassstroy belongs to Sergei Pavlov and Viktor Neustroev in equal shares. Since 2004, the bank had been actively engaged into the provision of consumer loans and attraction of consumer finances to its deposits. As of the end of 2013, the Board of Directors of the Novokuznetsk Municipal Bank Joint Stock Commercial Bank Open Joint Stock Company included: Sergei Pavlov (Chairman), Zinaida Matsukevich, Viktor Neustroev, and Aleksander Pavlov. The bank management included: Aleksander Pavlov (Director), Elena Vlasenko, Irina Adushkina, and Valentina Luchina.
In December 2016, the Novokuznetsk Municipal Bank (NMB) started delaying payments of dividends to deposit holders and issuing of funds to its clients. Neither legal entities, nor individuals were able to use their accounts in full. There were huge lines to ATM machines (at that time, most Novokuznetsk enterprises were clients of NMB and transferred salaries to bank cards of their employees). Then additional branches have been closed – according to the official explanation, due to issues with the server. As of December 13, 2013, the Bank had 253 outstanding payment requisitions from its creditors for the total amount of 15.48 million rubles; as of January 1, 2014, it had 1,557 outstanding payment requisitions. On January 9, 2014, the Central Bank has revoked the NMB license and appointed an interim administration. The reasons for the license revocation included “non-compliance with the federal laws regulating banking activities and regulations of the Bank of Russia; and inability to satisfy creditors’ requirement related to the financial obligations”. The Central Bank has also noted that “the bank was actively involved by its owners into the crediting of their own business” and “the NMB had been pursuing high-risk credit policies without creation of reserves adequate to the accepted risks to offset possible losses related to the loan indebtedness”. By the time of license revocation, in January 2014, over 99% of the bank shares belonged to Yuzhkuzbassstroy Construction Company Closed Joint Stock Company, which was also recognized a bankrupt in May 2014. Yuzhkuzbassstroy was controlled by Novokuznetsk-based businessmen Viktor Neustroev and Sergei Pavlov. Sergei Pavlov was also the Chairman of the NMB Board of Directors, while his son Aleksander Pavlov was the Director of the NMB.
Since December 2012 and until December 2013, the Director of the NMB had been acting in the interests of a company belonging to his father – Yuzhkuzbassstroy Construction Company Closed Joint Stock Company. The bank acted as a guarantor of the construction company’s loan liabilities. In the end of 2013, Yuzhkuzbassstroy has stopped complying with its obligations; and the creditors have deducted over 3 billion rubles from NMB accounts in fulfillment of bank guarantees. This is a brief story of the bank’s collapse.
The investigation has uncovered further details of this controversial banking policy. The father and the son have signed a protocol of the meeting of the NMB Board of Directors giving a consent to the bank to provide securities for credit liabilities of Yuzhkuzbassstroy Construction Company Closed Joint Stock Company. Both were well aware that the bank had no legal and real possibilities to guarantee these credit obligations. Nobody else was aware of these details. Only Elena Vlasenko, the Deputy Director of the NMB, has been given some instructions.
Without approval from the NMB Board of Directors (the meeting that had allegedly made these decisions was never conducted in reality) and without notifying the accounting department of the bank about these deals, Aleksander Pavlov has personally become a guarantor for the loan obligations of Yuzhkuzbassstroy to the following creditors:
Financial and Industrial Bank Joint Stock Commercial Bank – 350 million rubles
RIABANK Closed Joint Stock Company – 126.15 million rubles
Universal Finances Commercial Bank Closed Joint Stock Company – 250 million rubles
National Standard Commercial Bank Limited Liability Company – 400 million rubles
NK Bank Open Joint Stock Company – 400 million rubles
Development Capital Bank Joint Stock Company – 770 million rubles
Bank Russian Credit Open Joint Stock Company – 400 million rubles
Corporate Financing Bank Limited Liability Company – 250 million rubles
The above deals had not been recorded in the accounting system of the financial institution. As a result, after the bankruptcy of Yuzhkuzbassstroy in spring 2014, the borrowed funds in the amount of 3.2 billion rubles, including accrued interest, have been deducted from the bank’s accounts with consent of the Director of the NMB.
The forensic economic investigation has found that the financial standing of the NMB at the time of the deal allowed it to guarantee (including bank guarantees, formal offers, promissory notes, etc.) credit liabilities of Yuzhkuzbassstroy in the amount not exceeding 435 million rubles. The bank guarantees and repayment of Yuzhkuzbassstroy liabilities have considerably affected financial parameters of the bank, while its reserves were insufficient to offset possible losses related to the guarantees provided. The loss of 105 million rubles sustained by the Bank in 2013 has increased by 1.6 billion rubles.
According to Elena Vlasenko, the ex-Deputy Director of the NMB and a witness in this case, in the period since 2008 and until December 2013, the NMB had repeatedly acted as a guarantor for loans of Yuzhkuzbassstroy. Promissory notes purchased by the bank and totaling credits received by Yuzhkuzbassstroy had been used as securities; or the NMB had been depositing interbank credits on correspondent accounts of banks crediting Yuzhkuzbassstroy. The bank, in the person of its Director Aleksander Pavlov, acted as a guarantor for his father’s company. The father and son Pavlov had been instructing Elena Vlasenko on a regular basis to raise money for Yuzhkuzbassstroy against bank’s guarantees and provided specific amounts required in each particular case. While instructing her to find a bank to credit Yuzhkuzbassstroy, Pavlov junior had always referred to Pavlov senior, who determined the amounts and loan periods required for the crediting of his construction company. Vlasenko fulfilled all such instructions because she thought that those had been agreed with the Board of Directors.
Viktor Neustroev, the member of the NMB Board of Directors, told the investigation that Sergei Pavlov, the Chairman of the NMB Board of Directors, had been personally bringing him for signature papers related to bank operations. Neustroev did not rule out that these papers could include documents related to bank management and loans, as well as protocols of meetings of the Board of Directors. He used to sign all documents submitted by Pavlov senior because they had an arrangement from the very beginning that Sergei Pavlov shall manage this aspect of their joint partnership. Neustroev had always trusted Pavlov as his business partner. Zinaida Matsukevich, another member of the NMB Board of Directors, has confirmed that the protocols had been signed post factum, without holding actual meetings to discuss major deals (e.g. provision of promissory notes as a security for Yuzhkuzbassstroy liabilities). The protocols brought to her for signing already had signatures of the father and son Pavlov.
The investigation has also found that the Director of the NMB, jointly with Svetlana Marchenko, the Head of the VIP Clients Department, had been transferring clients’ funds to affiliated companies without notifying the deposit holders. In total, the accomplices have embezzled over 1 billion rubles from accounts of 4 bank clients. The first such criminal transaction was performed in the end of 2010: 230 million rubles had been transferred from a client’s account to TD Schwartz Gold Limited Liability Company and Alfa Ugol Capital Limited Liability Company – allegedly, in accordance with an interest-free loan contract. Svetlana Marchenko told the court that she was fully aware that such transactions required a consent from the client. But she also understood that should she disobey a Director’s order, she can lose a well-paid job – so, she had made her choice. The same scheme was later used to transfer clients’ funds to people close to Pavlov. For instance, large amounts of money had been transferred to some A.N. Nissenbaum, a relative of the Director of the NMB (brother of his spouse). For several years, wealthy clients had remained unaware that millions are being withdrawn from their accounts. These larcenies have come to light after the discovery of offences committed by the NMB management. There are four multimillionaires among the victims of this embezzlement scheme; in total they have lost over 1 billion rubles.
In May 2016, the Central District Court of Novokuznetsk has sentenced Marchenko under part 4 of Article 160 of the Criminal Code of the Russian Federation (Misappropriation or Embezzlement on an especially large scale) to 4 years conditionally with a probation period of 4 years. The proceedings against her have been separated from other defendants and examined individually because she had made a plea deal with the investigation. Aleksander Pavlov has yet to answer for this aspect of his illegal operations – although the ex-Director of the NMB denies any guilt.
To compensate damages sustained by clients of the Novokuznetsk Municipal Bank, the investigators have seized all assets of the Pavlov family, including the City Mall Trade and Entertainment Center in Novokuznetsk worth some 5 billion rubles, apartments, motorcycle, car trailer, and monetary funds of the former banker.
The total value of the NMB assets (completed and uncompleted real estate, equipment and transport) is estimated at 14 billion rubles. Time will show how liquid these assets are. A representative of the insolvency administrator – the Deposit Insurance Agency of Russia – has stated that only 9 sales of main assets of the bankrupt bank had been made in summer; their total proceeds amounted to 11 million rubles. For the whole period of sales, out of the 1,279 lots offered for sale (requisitions under credit agreements, banking equipment, office equipment, real estate, vehicles, and a polyptych of 33 paintings with the starting price of 326 thousand rubles), only 35 have been sold. In addition to the banking equipment, several vehicles and items worth less than 100 thousand rubles each have been sold. As of the end of this summer, 1.66 billion rubles have been paid to satisfy the requirements of first-priority creditors; this allowed to cover 14.7% of these requirements. Currently, the Novokuznetsk Municipal Bank has over 4.1 thousand creditors; the total amount owed to them is 12.6 billion rubles, including 11.3 billion rubles owed to the first-priority creditors. According to financial analysts, legal entities having deposits in the NMB (some 500 million rubles in total) are the most vulnerable category of creditors: they would get a chance to recover their money only if it comes to satisfaction of requirements of third-priority creditors.
In March 2016, the court has changed pretrial restrictions for Aleksander Pavlov from an undertaking not to leave to detention. Currently the ex-banker is in a pretrial detention facility. The location of his father Sergei Pavlov, a shareholder in Yuzhkuzbassstroy, is unknown. He has been put on a federal wanted list. In April 2015, the Arbitration Court of the Kemerovo Region has ruled to collect 1 billion 110 million rubles from Sergei Pavlov in favor of Yuzhkuzbassstroy. In addition, the businessman is suspected of abuse of official powers. However, he has absconded before the indictment. It can’t be ruled out that Pavlov senior has left Russia, possibly, with a forged passport. The Interpol has not received a warrant against Sergei Pavlov yet.
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