Seizure of Bulgaria's Corpbank

In June 2014, a run on Bulgaria’s Corporate Commercial Bank (Corpbank) brought down the bank, the country’s fourth largest. It was closed down by the country’s central banking system, the Bulgarian National Bank, and had ripple effects throughout Bulgaria’s economy. As a result, international investors are wary of making investments in the country. Corpbank’s owner, Tzvetan Vassilev, fled the country after being charged with embezzlement.[1]

People

Tzvetan Vassilev

In 2013 Forbes named Tzvetan Vassilev the "most influential Bulgarian." Vassilev owned 100% of the shares of a finance house called Bromak EOOD. Until the government takeover of Corpbank, he was the majority shareholder of Corpbank. The bank controlled other companies which employed over 16,000 people.[2]. In 2014 this whole story turned into a nightmare for thousands depositors who had the bad luck to invest into Corpbank. Following a bank run in June 2014, which some say that was artificially induced, but all the following probes and revisions showed that the bank was embezzled by its majority owner Tzvetan Vassilev Reuters reported, it requested special supervision by the Bulgarian National Bank. Its license was subsequently withdrawn in November 2014. The chairman of the bank's supervisory board and majority shareholder, Tsvetan Vasilev, fled the country and as of now is being sued in Bulgaria for syphoning off Corpbank and embezzling more than 2 bln leva. He is also being investigated in Serbia for deliberate bancruptcy of a glass factory financed by Corpbank. There are investigations against him in two more countries on allegations of money laundry - in Switzerland and in Luxemberg where the case is frozen till the proceedings in Bulgaria end.

Delyan Peevski

Until 2014, Vassilev and Delyan Peevski, the owner of a vast network of media entities, were friends. Corpbank financed some of his business activities. Peevski’s business expansion, which was funded by Corpbank, made it so that he controlled around 85% of Bulgarian media.[2]

At some point, the two men had falling out. Vassilev told Peevski that he would discontinue funding Peevski’s business expansion. The relationship became so sour that at one point, each man claimed that the other was trying to murder him.[2]

Peevski retaliated by using his media outlets to spread rumors that Corpbank was financially unstable. His oppnents state that these reports have triggered a bank run (see section: Bank run) that ultimately led to Corpbank’s downfall. Yet the first to reveal the truth about Corpbank being turned into financial pyramid by his majority holder were not Peevski's media outlets but his opponent's publications (Ivo Prokoiev) Capital and Dnevnik. Moreover, after the bank run in the third week of June 2014, the administration of the bank asked conservatorship from the Bulgarian National Bank. The Bulgarian National Bank withdrew the bank's license on 6 November 2014.The decision was prompted by the results of a triple probe, ordered by the Bulgarian National Bank and performed by three auditing firms. The probe showed that Corpbank was completely syphoned off and cannot be revived. One year later Bulgaria’s Deposit Insurance Fund chose forensic advisory firm AlixPartners to help trace and recover the assets of insolvent Corporate Commercial Bank (Corpbank), Reuters reported here. AlixPartners issued a report which was translated and published after the approval of a new bill, moved by Delyan Peevski and his colleagues from the parliamentary group of DPS. AlixPartners' investigation showed that the bank functioned as a financial pyramid and describes the siphoning off schemes. The company's report showed that Corpbank was siphoned off through large loans to companies related to the majority shareholder Tzvetan Vassilev. More than half of the loans at the value of 2,5 billion BGN were given to companies related to Vassilev. It also showed that the majority shareholder also used the bank for “personal transactions”. 243 corporate clients of the bank had 472 outstanding loans. These loans, according to the auditors, are unlikely to be recovered, because they were given to non-functioning enterprises or had little collateral. The loans were used to settle other loans to CCB or to finance people who were not CCB’s clients. The schemes for siphoning off included:Loans to companies without credit history and without resource; loans to borrowers to repay other loans; loans without collateral; loans for working capital; loans for purchase of shares in companies ownership of CCB, Bulgarian National TV reported here.

Peevski grew up with connections; his mother, according to The New York Times, used to head the national lottery empire and is the ultimate leader over Peevski’s growing media empire. She has strong connections, both economic and political.[3]

Peevski is both a politician and a businessman. He has long been associated with the political party "Movement for Rights and Freedoms" (DPS in Bulgarian). Among the locals, the party is known as the "Turkish party" because it promotes the rights of Bulgaria’s Turkish minority.[2]

According to Forbes, "Peevski ... is associated with shady dealings going back years: he was briefly investigated for corruption in 2007 but the case was dropped. Because of the scale of his business interests (including those in his mother’s name), he effectively controls large parts of the Bulgarian economy."[2]

In 2013, Bulgarian voters elected Peevski as a Member of Parliament. The Oresharski Government then appointed him as head of the State Security Agency, but removed him from the position after street protests and demands for the government’s resignation. Nonetheless, accusations that the government was supporting Bulgarian oligarchs and mobsters continued.[1]

"Delyan Peevski is simply one of the main tools that the Bulgarian political mafia uses to blackmail Bulgarian business—the visible part of a rather large iceberg of corruption. The political mafia is persistently trying to downgrade what happened to Corpbank to a personal conflict between Mr. Peevski and me, which is utterly untrue. I had a conflict with the political mafia ruling the country, which has been blackmailing and threatening me for many years." - Tzvetan Vassilev, Forbes interview (10/5/15)

Extortion attempt

In April 2014, associates of the mafia-ruled DPS, one of the most powerful political parties in Bulgaria, asked Vassilev to give them bank assets for free.[1]

"I was told that Corpbank would be taken down if I did not satisfy their ‘request’," Vassilev said. "I refused…..but I now know that Corpbank’s destruction was planned months before the bank run. The goal was to acquire Corpbank’s most attractive assets at a low price and to eliminate me as an influencer in the socio-economic life of the country."[1]

Bank run

The bank run started when the prosecution entered the offices of the bank as a result of a fake accusation accompanied by a black PR campaign in the media of Peevski.

Following the bank run, Corpbank was closed for nearly six months. During that time, depositors were unable to pull their money out. Bulgaria’s deposit insurance fund was not large enough to compensate insured depositors, so Bulgaria needed to raise additional funds. To complicate matters further, the country was without a government from July to October 2014. Therefore, paying the depositors was an impossible task. Reopening the bank was not an option either, since that would simply restart the run. Therefore, the BNB kept the bank "on ice".[1]

Shutdown of Corpbank

In July 2014, the central bank said it was removing Corpbank’s banking license and would move the bank’s healthy divisions into a separate bank. These events marked the first banking collapse since Bulgaria’s 1996-1997 domestic financial crisis.[4]

According to Forbes, "The central bank denied Corpbank liquidity support, forcing it to close its doors. Corpbank’s management asked the central bank to put Corpbank into "special supervision", a procedure under which the central bank temporarily takes over a troubled bank in order to put it back on track."[1]

Special treatment of another bank

Shortly after Corpbank’s failure, another bank run happened to a bank called FIBank. The central bank’s response to FIBank’s bank run was much different than its response to Corpbank’s. The central bank gave FIBank plenty of liquidity to protect FIBank’s financial stability, even though it had already allowed the bank to fail. According to Vassilev, this double standard was due to "the will of the political mafia".[1]

The government ultimately brought down Corpbank to remove Vassilev; it protected FIBank to serve political ends.[1]

No nationalization

The Bulgarian central bank (BNB) accused Corpbank of extensive fraud. Because of this apparent fraud, BNB said that nationalizing Corpbank was not an option. BNB described the extent of the bank’s fraud as "a bottomless barrel".[5]

The Deposit Insurance Fund of Bulgaria guaranteed all deposits up to 100,000 euros.[5]

Blame

Media reports say that BNB was aware that it failed to adequately supervise the bank. But more specifically, BNB places blame on one of its officials, the Deputy Head of Banking Supervision. Everyone else on the BNB board was exonerated. "This does not bode well for the future of bank supervision in Bulgaria," Forbes wrote.[5]

BNB also made a specific accusation of fraud against Vassilev in relation to the withdrawing of funds in advance of Corpbank's failure.[5] According to BNB, "Specifically - according to conservators - on June 19 this year, the day before the Corporate Commercial Bank was to be placed in special measures, a third party downloaded and delivered against receipt to the majority owner of Corporate Commercial Bank 205 887 223 BGN equivalent in cash, mostly Euro."[5]

Attempted rescue plans

Breach of EU rules

Bulgaria was in "triple breach of EU law regarding treatment of its depositors":[1]

  1. Bulgaria wrongfully transposed the EU Directive on the Deposit Guarantee Schemes.
  2. It did not perform its obligation, as required by the directive, to repay the eligible deposits within 20 days following the bank’s failure.
  3. The Deposit Insurance Fund, which is supposed to insure all guaranteed deposits in the Bulgarian banking system, was mismanaged. Furthermore, the fund only held 1 billion euros, an insufficient amount of money to repay the guaranteed deposits "even in one troubled bank."

In October 2014, following complaints from depositors, the European Commission and European Banking Authority demanded that Bulgaria compensate insured depositors. Bulgaria refused, claiming that under Bulgarian law the bank had to be "declared insolvent" before deposit insurance could be paid. Insolvency could only be declared after a full audit, which would take four months to do. In December 2014, the depositors eventually got their funds.[1]

Attempted rescue by owners

The shareholders attempted to put a rescue plan together for the bank, but it wasn’t accepted. According to Vassilev, the circumstances surrounding the revocation of the bank’s license were suspicious. He and other shareholders, including the Omani Sovereign Wealth Fund (the second-largest shareholder) put forward a rescue plan for the bank. But the parliament dismissed their proposal "out of hand."[1]

"Even though we made a solid proposal to the Bulgarian state, we were turned away in the most humiliating manner by the central bank and by the ruling government," Vassilev said. "We were simply told that our proposal was "unserious" without any clarification on the reasons why they deemed so and without a proper meeting to discuss it."[1]

After Corpbank’s license was revoked, the bank was forced into insolvency.[1]

The Omani Sovereign Wealth Fund sued the Bulgarian government in the International Court for Settlement of Investment Disputes, based in Washington, D.C., for rejecting the rescue plan. Omani Sovereign Wealth Fund alleged that the rejection breached key principles regarding equal treatment and protection of investors.[1]

Embezzlement charges

As of October 2015, Vassilev was accused of embezzlement, although at that time no charges were officially filed. The BNB claimed that he ran a pyramid scheme.[1]

The Bulgarian’s office fabricated the accusation, Vassilev said, in order to arrest him and use it as an action to block his and his family’s assets.[1]

Initially, the central bank’s governor accused Vassilev of taking 200 million leva in plastic bags from Corpbank’s headquarters during the week of the bank run. Vassilev said he had been traveling abroad that week. He also said, "200 million takes a lot of space and cannot go unnoticed if you carry it on your back in the middle of Sofia." The Bulgarian Prosecutor General modified the charging documents, changing the timeframe of the alleged embezzlement from the week of the bank run to the span of several years.[1]

Additionally, the accusation was based on the statements of only two witnesses. "It was already proven in court that one of the witnesses had forged my signature on documents she presented as proof of the alleged crime," Vassilev said. "And some of the senior staff of Corpbank were pressured to testify against me by the prosecution service through the use of threats."[1]

References

  1. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Coppola, Frances (2015-10-05). "Bulgaria's Failed Corpbank: The Former Owner's Story". Forbes. Retrieved 2017-01-24.
  2. 1 2 3 4 5 Coppola, Frances (2014-07-15). "The Bulgarian Game Of Thrones". Forbes. Retrieved 2017-01-24.
  3. ↑ Brunwasser, Matthew (2013-06-28). "After Political Appointment in Bulgaria, Rage Boils Over". The New York Times. ISSN 0362-4331. Retrieved 2017-01-24.
  4. ↑ "UPDATE 5-Bulgaria to allow its fourth-biggest bank to collapse". Reuters. 2017-07-11. Retrieved 2017-01-24.
  5. 1 2 3 4 5 Coppola, Frances (2014-07-12). "The Curious Case Of The Bulgarian Bank Runs". Forbes. Retrieved 2017-01-24.
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