Story for the mafia in my little country and NO LAWS !

In July 2014, a run on Bulgaria’s Corporate Commercial Bank (Corpbank) brought it to its knees. It was closed down by the Bulgaria National Bank, and its owner, Bulgarian banker Tzvetan Vassilev, fled the country.

Media reports at the time said the bank’s failure was due to a “spat” between Tzvetan Vassilev and Bulgarian media oligarch Delyan Peevski. This sort of thing is all too familiar to Bulgarians: “Oligarchs fight and the little people get hurt”, said one source.

But when I spoke to Tzvetan Vassilev in August this year, he told me a very different story:

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.

So why did Corpbank fail, if not due to a dispute with Mr. Peevski? "Corpbank fell victim to the greediness of the Bulgarian political mafia which controls most state institutions behind the curtain”, said Mr. Vassilev. And he went on to tell an extraordinary story of malice, corruption and incompetence in Bulgarian institutions.

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Bringing down the bank

Mr. Vassilev's story begins in April 2014, when he was apparently asked to transfer assets for free to the mobster circle of DPS, one of the most influential political parties in Bulgaria:

I was told that Corpbank would be taken down if I did not satisfy their ‘request.’ 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.

According to Mr. Vassilev, the bank run was started deliberately. But not through rumors that depositors’ money was unsafe, which is how bank runs usually start. No, in Bulgaria they do things more dramatically. Bulgarian media accused the bank’s owner of attempted murder:

“What triggered the bank run was media speculation, fuelled and encouraged by the Bulgarian prosecution service, that I had commissioned Delyan Peevski’s murder. Innocent men were arrested and presented on TV as murderers hired by me. On the same day, in search of proof of attempted murder, the prosecution raided offices of companies affiliated to me and confiscated accounting documents. Mysteriously, all major Bulgarian TV stations were mysteriously invited to report this raid live.

The claim that I had tried to organize Mr. Peevski’s murder was subsequently disproved in court, but it was too late—more than 20% of Corpbank’s assets were withdrawn in cash in the span of 4 days.

The Bulgarian National Bank (BNB) 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.!
But there was another bank run shortly after Corpbank’s failure, to which the BNB’s response was very different. FIBank was provided with ample liquidity by the BNB, for which the BNB sought and obtained permission from the EU under State Aid rules. The purpose of the liquidity support was to protect financial stability: but the BNB had already allowed a bank to fail. According to Mr. Vassilev, this apparent double standard was due to “the will of the political mafia”. Interestingly, Nikolay Staykov of the Bulgarian Protest Network also commented on the BNB’s “different objectives” with regard to the two banks: Corpbank was to be brought down in order to remove Tzvetan Vassilev, while FIBank was to be protected because it served dominant political interests. When Mr. Vassilev and Mr. Staykov say similar things, we live in strange times indeed.

(Mr. Staykov has asked me to point out that the Bulgarian Protest Network's letter to the Chief Prosecutor sparked investigation of the BNB and Mr. Vassilev's SPV structure. He says the BNB refused the Chief Prosecutor access to detailed information.)

Deposit insurance failure

Following the bank run, Corpbank remained closed for nearly six months, during which time depositors were denied access to their money. The deposit insurance fund was nowhere near large enough to compensate insured depositors, so Bulgaria needed to raise additional funds. But Bulgaria was without a government from July to October 2014, and its currency board prevented the BNB from creating money to satisfy depositors’ claims. Paying off depositors was therefore impossible. But reopening the bank was not an option either, since that would simply re-start the run. Therefore, the BNB kept the bank "on ice".

Mr. Vassilev said that Bulgaria was in triple breach of EU law regarding its treatment of depositors:

First of all, it had wrongfully transposed the EU Directive on the Deposit Guarantee Schemes. Secondly, it did not perform its obligation by the directive to repay the eligible deposits within 20 days following bank failure. Thirdly, the Deposit Insurance Fund, which is supposed to insure all guaranteed deposits in the Bulgarian banking system, was mismanaged and consisted only of 1 billion euros—money insufficient to repay the guaranteed deposits even in one troubled bank.

His comments appear accurate. In October 2014, following complaints from depositors, the European Commission and European Banking Authority demanded that Bulgaria recompense insured depositors. But Bulgaria refused, claiming that under Bulgarian law the bank had to be actually declared insolvent before deposit insurance could be paid, and insolvency could not be declared without a full audit, which would take four months to complete. The depositors eventually got their money in December 2014, though many suffered serious hardships due to the extended closure of the bank.

The “audit” that wasn’t an audit

There was indeed an audit, by Deloitte, EY and AFA. It was completed one week after the election of a new government which could authorize the necessary borrowing. Funny, that.

Mr. Vassilev was scathing about this audit, describing it as “fake” and claiming that its purpose was to make Corpbank look bad on paper “in order to fabricate an excuse for the purposefully irresponsible policy towards it”. He gave these reasons for his criticism:

First of all, the central bank entered into an agreement with three consulting companies to evaluate Corpbank’s assets based on an obscure methodology which has been applied in neither Bulgaria nor the EU before. The central bank presented this evaluation as an “audit” even though the evaluation does not apply the accepted international accounting standards and the companies that carried it out do not themselves recognize it as an audit. Secondly, the central bank refused to disclose the contents of this document to the public, despite the fact that Corpbank’s banking license was revoked solely on the grounds of this document.

These criticisms are serious. Was this “audit” done according to internationally-recognised accounting standards? Did the auditors realize that the future of Corpbank depended on their findings? Why has the report never been made public?

He also questioned the competence of the BNB prior to Corpbank’s failure:

If anything were wrong with Corpbank, why did the central bank authorize it to acquire Credit Agricole Bulgaria EAD—a procedure which indeed involves a careful audit of the buyer—in 2014? Moreover, why did it not discover anything wrong in its regular checkups beforehand?

He has a point. Corpbank acquired Credit Agricole Bulgaria only a week before its failure. It is hard to see that the BNB can have exercised adequate supervision.Mr. Vassilev went on to criticize the BNB’s handling of Corpbank’s closure and eventual resolution:

It appointed incompetent special supervisors who did not even fulfill the criteria enumerated in Bulgaria’s Credit Institutions Act for that position. Instead of taking measures to stabilize Corpbank, they closed all its operations, forbade clients to repay their loans to Corpbank with money they had on their deposits, etc.

And Mr. Vassilev alleged that during the bank’s extended closure, vested interests were paid off with the proceeds from selling Corpbank’s assets:

the second biggest oil retailer Petrol AD, Corpbank’s headquarters’ building, glassmaking factory Rubin Pleven, real estate assets worth more than 100 million euros, etc.

The BNB can reasonably be accused of incompetence. But the last statement is far more serious. Did the conservators asset-strip Corpbank?

Draining the bank?

Mr. Vassilev himself stands accused of embezzlement, although no charges have yet been brought. The BNB claimed that he ran a pyramid financing scheme. Unsurprisingly, in my conversation with him, he denied this:

The prosecution service fabricated this accusation, together with the central bank, to be able to arrest me in case I was in Bulgaria or to issue an International Arrest Warrant in case I was abroad. It also used it to block all of my and my family’s assets.

He went on to explain:

Initially, the central bank’s governor accused me of taking 200 million [leva] in plastic bags from Corpbank’s headquarters during the week of the bank run. As I had been abroad during that week and, as I assure you, 200 million takes a lot of space and cannot go unnoticed if you carry it on your back in the middle of Sofia, the prosecution subsequently modified the accusation to “draining 200 million from Corpbank in the span of several years.

And he claimed that the evidence against him was fabricated:

The accusation is solely based on the statements of 2 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. And some of the senior staff of Corpbank were pressured to testify against me by the prosecution service through the use of threats.

Moving 200 million leva in physical cash out of the country in one day does seem unlikely. But the accusation that Corpbank was drained over several years is far more credible. I asked Mr. Vassilev to explain the purpose of the complex structure of legal entities that the BNB said was used to drain Corpbank. Mr. Vassilev replied that it was intended to finance business acquisitions:

Corpbank relied on a variety of SPVs, which it controlled, to provide different types of project financing—for acquisitions, capital increases, green field investments, etc. This method was particularly helpful in the aftermath of the crisis of 2008 because of the specific needs for recapitalization of many of our clients. Through SPVs we successfully financed the acquisition of key companies, such as 77% of Vivacom (number one incumbent telecom in Bulgaria, market cap 1.1 bln euro), 97 % of Petrol (number 2 oil retailer in Bulgaria, market cap 350 mln euro), Nurts- telecommunication infrastructure and digital platforms (enterprise value of more than 150 mln euro), etc. Corpbank’s team of highly qualified analysts critically scrutinized every proposal to evaluate its pros and cons. As often happens in banking, some investment decisions turn to be good and some not. To stay alive in banking, however, the good decisions have to substantially outnumber the bad and our record shows that this was true in our case.

Mr. Vassilev believes that valuation of the assets owned by the SPVs at a realistic market price would be enough to repay Corpbank’s loans to the SPVs. Sadly we are unlikely ever to know whether this is true. The conclusion of the audit was that the loans should be written down to zero. This is the proximate cause of Corpbank’s insolvency and the reason for the revoking of its banking license.

The rejected rescue plan

According to Mr. Vassilev, the circumstances of the revoking of that license are decidedly odd. He and other shareholders, including the second-largest shareholder, the Omani Sovereign Wealth Fund, put forward a rescue plan for the troubled bank. But the proposal was dismissed out of hand by the Bulgarian National Bank:

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. 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.

A week later, Corpbank’s license was revoked and it was forced into insolvency. However, the shareholders’ rescue plan envisaged the Bulgarian government contributing half the rescue funds. This, plus the involvement of Tzvetan Vassilev, was probably the grounds for its rejection.

The Omani Sovereign Wealth Fund is now understood to be suing the Bulgarian government in the Washington-based International Court for Settlement of Investment Disputes over its rejection of the rescue plan, which the Oman SWF claims breached key principles regarding equal treatment and protection of investors.

Conclusion

This is a sorry tale, and we will probably never know the truth. Parts of Mr. Vassilev’s story ring true: Bulgarian corruption is legendary, and it is an open secret that politics and the media are controlled by the Bulgarian mafia, who would not hesitate to bring down a bank if it suited them to do so. There certainly seems to be more to this than a simple case of bank fraud. But although Mr. Vassilev may be more sinned against than sinning on this occasion, I doubt if he is quite as blameless as he would like us to believe.

However, the bigger deal here is the behavior of the Bulgarian authorities. As I write, representatives of Corpbank depositors, bondholders and shareholders are petitioning the European Commission and the European Banking Authority for an investigation into the conduct of the Bulgarian authorities over Corpbank’s failure. The petition is a comprehensive document with supporting evidence, some of which supports Mr. Vassilev’s version of events and virtually all of which shows the BNB and the Bulgarian Chief Prosecutor in a very bad light. Whether these institutions are corrupt and malicious or simply incompetent and overwhelmed is presently unclear: I have heard both, from different people. An independent investigation is desperately needed and it is to be hoped that the EU takes prompt and effective action this time.

Previous responses of EU institutions to complaints from people affected by the Corpbank affair have been disappointing. But in the end, this is not the EU’s problem but Bulgaria’s. Bulgaria needs to take a leaf out of Romania’s book, and work to root out corruption everywhere, whether in the management of banks, the control of the media or the governance of institutions. And above all, in its political parties. For if politics is corrupt, the rest of society will be too.