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Buyer beware as Moldovan lender seeks investor

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Buyer beware as Moldovan lender seeks investor

Amajority stake in Moldova's second-largest bank by assets is up for grabs, butquestions over governance, asset quality and brand reputation stemming from aseries of allegations of involvement in financial crime mean that any would-beinvestor would have to conduct extensive due diligence, sources told S&PGlobal Market Intelligence.

in early April that itis seeking "a strategic investor of international reputation" to takea majority stake. The transaction would be "beneficial for the furtherdevelopment of the bank and the Moldovan banking sector," it added,without indicating how much exactly is up for sale.

Butbecause the bank's ownership has included opaque offshore entities, localbusinessmen with checkered pasts and individual shareholders accused ofrepresenting shadowy interests, buyers might be reluctant to step forward.

Moldova scarred by bank fraudcase

Situatedbetween Romania and Ukraine, the ex-Soviet republic of Moldovais Europe's poorest country in terms of GDP per capita, ranking between Syriaand Laos at $1,790 in 2015, according to EIU data. Moldindconbank had totalassets of about 13.26 billion Moldovan leu at the end of 2014, according toS&P Global Market Intelligence data, equivalent to about $674 million atcurrent exchange rates. Total assets in the country's banking sector were 69.66billion leu and gross credit amounted to 37.85 billion leu at the end of thefirst quarter of 2016, according to the country's central bank.

Thereputation of the Moldovan banking sector was badly damaged in 2014 and 2015 bythe discovery of a wide-ranging fraud that sucked out the equivalent of an eighth of GDPand left the economy and political landscape in disarray. ,BC Banca Sociala SAand Banca de EconomiiSA were stripped of cash through fraudulent loans to shellcompanies allegedly controlled by Ilan Shor, a powerful local businessman. Theywere placed under special administration in late 2014 and liquidated in late2015.

InJune 2015, Banca Nationala aMoldovei, the central bank, put three other lenders, including Moldindconbank, underspecial supervision. As part of the supervisory review, a diagnostic audit intothe activities of Moldindconbank was commissioned with KPMG Romania in late2015.

Althoughthe report has never come to light, a source with knowledge of its contentstold S&P Global Market Intelligence that it found that the bank's ownershiplacks transparency and as such breaches regulatory guidelines. In addition, thereport allegedly found problems relating to some loans, which later becamenonperforming, made to parties related to the shareholders, said the source,who asked to remain anonymous given the sensitivity of the manner.

Thecentral bank demanded the sale after seeing the report, in a bid to diminishthe influence of Moldindconbank's current owners, the source said.

MariaStancu, a spokeswoman for KPMG Romania, declined to reveal the findings of thereport because of confidentiality clauses in the agreement with the centralbank, but she confirmed to S&P Global Market Intelligence that KPMG Romaniadid audit Moldindconbank. S&P Global Market Intelligence has independentlyconfirmed the report's existence with other sources with knowledge of thematter.

Aftermaintaining repeatedly that the KPMG report "does not exist,"Moldindconbank subsequently told S&P Global Market Intelligence that KMPGdid produce the report and "submitted a draft version which the bank didnot accept." Spokesman Vladislav Strisca said in an emailed response thatthe bank "does not have the report at the moment," and he denied thatthe central bank had any influence on the stake sale decision.

Striscaalso told S&P Global Market Intelligence that the bank has no capitalissues. "The size of the bank's capital fits into the necessary parametersand meets the demands of [Banca Nationala a Moldovei], therefore respecting allthe prudential norms established by current legislation," he wrote.

"Thesale process was initiated by bank shareholders, for whom two possibilities aresought, either through the issuance of new shares or through the purchasing ofshares from existing shareholders with a [cumulative] stake of over 51%,"he added.

Proceed with caution

Butthe head of a financial research firm based in the Moldovan capital said in aninterview that, "Any investor looking at the bank would have to conductvery thorough due diligence before committing."

NatanGar?tea, CEO of Chisinau-based Estimator VM, said the extension of loans toparties related to shareholders could pose a threat to asset quality, and headded that although Moldindconbank has never faced criminal action, itsreputation has been severely affected by its connection to multiple scandals.These include a money laundering scheme, dubbed "the RussianLaundromat" by the investigative journalists who exposed it, that sawabout $20 billion of unknown provenance passing from Russia throughMoldindconbank and onward to the European financial system.

But,said Gar?tea, "The biggest image problem it had was its [alleged]involvement in the Magnitsky case," a Russian tax fraud that deprived theRussian government of $230 million and ended with the 2009 death in policecustody of Sergei Magnitsky, the attorney who first discovered and reported thecrime.

Regulatorswould be happy to see the bank change hands, he said, observing that"there were many signals from the central bank" encouraging a changeof ownership.

Andthe initiative of Moldindconbank shareholders to find an investor to take acontrolling stake might be a last-ditch attempt to save the company'smanagement from being shaken up forcibly by the central bank, said the unnamedsource.

Aspokeswoman for the central bank told S&P Global that the governor has nocomment on the matter.

Governancehas been a point of contention for several years at Moldindconbank. VeaceslavPlaton, a local businessman who has a reputation for unorthodox financialtransactions and has been repeatedly accused, though never convicted, of fraudand corruption, is said to be the de facto owner of the bank despite officiallyowning only a small stake. He was once a vice president of the company.

"Peoplethink that Platon is controlling the bank," said Gar?tea.

Platoncould not be reached for comment despite repeated attempts by S&P GlobalMarket Intelligence.

Long road to cleanup

TheMoldovan central bank has started a tentative cleanup of the financial systemamid the fallout from the $1 billion fraud, which left the country's budget intatters after the government was forced to bail out depositors in UNIBANK,Banca de Economii and Banca Sociala. All but essential public spending has beenfrozen until further notice, and international creditors such as the IMF andthe World Bank have conditioned their continuing support on banking sectorreform. The World Bank itself demanded the special audit reports onMoldindconbank and the other two lenders under special supervision.

Butthe cleanup has proved easier said than done. As investigations got underway, agrenade assault in February 2016 on the Chisinau house of Dorin Dragutanu, theoutgoing governor of the central bank, was linked by police to his professionalactivity, according to reports in local press. Sergiu Cioclea, the new governoras of April, has since pledged to continue the overhaul.

ALondon-based investment banker with experience of the financial sectors inex-Soviet countries told S&P Global Market Intelligence: "I cannotimagine any reputable investor taking responsibility for a bank in Moldova atthe moment."

As of May 5, US$1 wasequivalent to 19.68 Moldovan leu.