- - Wednesday, October 10, 2018



I remember the 2008 financial crisis very well. Actually, I remember it starting in 2006. At the time, I was working at a very large Wall Street investment bank. My team handled institutional trading for certain offshore financial jurisdictions, places like Cayman, the Channel Islands, Bermuda, etc. I remember my boss walking in and talking about the impending financial collapse, and to make sure we attempted to help our clients through the coming doom.

One of the hallmarks of the 2008 crisis was the use of special purpose vehicles, or SPVs, in offshore financial centers to literally hide liabilities and take them off the balance sheet. These entities typically had no financial guarantees other than the assets which were placed in them. This was usually not a fact that those selling securities issued by the SPV made very clear to customers. These shell companies were typically run by law firms or banks, which could have hundreds or even thousands of companies living under the same roof on the beach. The results, well, they speak for themselves — a web of non-transparent transactions all backed by the witchcraft of financial engineering came crashing down and almost brought down the Western, capitalist world with it.

You would have thought the financial world would have learned to be wary of these techniques.

On second thought, it seems some people learned all too well. Enter the Ananyev brothers in Russia, stage left, a decade later.

Court documents filed in New York and London by plaintiffs harmed in a massive fraud using offshore jurisdictions to issue suspect securities through SPVs reveal an alleged scheme to rip off Russian investors to the tune of a few hundred million dollars.

Here’s how the scheme supposedly worked.

Several companies were set up offshore. They then issued credit-linked notes against the credit of two Russian banks owned by the Ananyev brothers, Promsvyazbank and Vozrozhdenie Bank. A credit-linked note is a security which pays off based on the performance of the underlying asset - a derivative security. Meaning, the note pays based only on the performance of the bank owned by the brothers. These banks did not guarantee the notes at all, but investors may have not been aware of that fact. In fact, nothing guaranteed the security of the notes except the offshore companies themselves, which were “undercapitalized.” However, the banks did “act as an agent” during the sale of the securities. In other words, they sold them like crazy, to the tune of a few hundred million U.S. dollars, to unsuspecting investors.

As with any too-good-to-be-true investment, the notes were offering a very high yield compared to similar instruments. Key customers were targeted to buy the notes, and they bought a lot of them. To make the deal even sweeter, the servicing agent for the credit-linked notes was Citibank. Of course, Citibank didn’t back the deal at all either, it just serviced the payouts of the notes, which is a normal practice. However, the banks used the Citibank name to good measure, allegedly leaving out details such as the fact that Citi did not guarantee the notes in any way, shape or form.

What was also not told to investors was that while the notes were being sold, the Ananyev brothers were allegedly looting Promsvyazbank and Vozrozhdenie banks, by taking out cash, selling stock and moving assets offshore to “friendly” jurisdictions, such as the old Russian favorite, Cyprus. This was all done on the eve of the takeover of the two insolvent banks by the Russian Central Bank. The assets were moved out in dollars, using the American financial system’s web of correspondent banks to do so. In short, the U.S. financial system was the getaway car.

Court documents filed in the Southern District Court of New York City declared: “Bank owners Dmitry and Alexei Ananyev directed their agents to prey on PSB Bank’s customers, who were a ready source of cash. Their assets could be, and were, used to deceive Russian regulators into thinking that PSB Bank’s financial position was better than it actually was. The charade unraveled, and the Central Bank of Russia took PSB Bank into administration in December 2017, but not before the brothers could raid it, leaving their investors— ordinary Russia citizens persuaded to deposit their savings in Loan Notes — with next to nothing.” Apparently, the Bank of Russia has referred the brothers to Russian law enforcement for evidence of fraud.

Meanwhile, defrauded investors have been attempting to recover their assets any way possible — hence court action in London and New York. There have been worldwide freezing orders issued for certain assets of the brothers’ in the U.K. But as we know from Bernie Madoff and other cases of fraud, those harmed usually get back cents on the dollar.

We requested a response from the Ananyev brothers’ attorneys in London and received no response.

The question for U.S. authorities is how can the American financial system be allowed to enable large-scale financial crime? The question for the Cypriot regulators is how can these types of criminal syndicates be allowed to operate in their jurisdiction? Will the U.S. Treasury and its Office of Foreign Assets Control go after the brothers for the alleged fraud? Will Cyprus be sanctioned for facilitating the fraud that has been allegedly directed from Moscow? Is American law enforcement going to get involved?

As we have seen with China, financial crime and economic warfare can be just as dangerous as kinetic aggression. A robust national security agenda requires acknowledgement of this fact and actions to support back it up.

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