How Ukraine's corrupt officials launder their earnings through government bonds

Author : Oleksiy Kushch

Ukraine’s National Bank recommends strengthening monitoring of financial operations with the government bonds in order to prevent legalization of the "dirty money"
13:00, 19 March 2019

Open source

Bacchanalia in the government bonds market, where stock speculators survive at the expense of the state budget, earning 20% "in currency," is multidimensional and exciting. And after the "Walpurgis night," the capital market will suffer from a bitter hangover.

As a "preventive measure," Ukraine’s National Bank (NBU) recommends that banks strengthen the monitoring of financial operations with the government bonds, including those denominated in foreign currency, in order to prevent legalization of "dirty money."

Related: Ukraine's Finance Ministry pays coupon in $110 million on Eurobonds

NBU has described the scheme, which is a cyclical resale within one business day of the "securities" with one ISIN code. At the same time, the purchase of bonds is carried out at a higher price, and the subsequent sale is at a lower price. Thus, one participant in the scheme receives a loss, while the other gets a profit.

For example, there is a certain public person, a politician, who during the day tells you about all the good things and how to love his homeland, and in the evening other thoughts devour him. He is worried about the cash. At the same time, his costs are enough, and recently, the journalists reveal all these schemes of cash flows. And this is worrying. Electronic declarations include cars, houses, apartments, fur coats, and jewelry. In general, the politician needs a lot of cash free bank transfers. And it requires having legal incomes.

Related: Ukraine intends to issue 10-year Eurobonds in dollars

Then brokers appear to help this public person, they buy a portfolio of government bonds for their bogus company. Let us say, the purchase price is 105 relative units. On the same day, bonds are sold to the politician for 95 units. Then he sells the securities to the bank for the market price of 100 units. For a single turnover scheme, the earnings policy is five relative units. The bank keeps a market portfolio of bonds. A straw company fixes a loss of 10 relative units, and after being involved in the scheme, it just goes to junk.

The negative delta formed in the participating company is overlapped by the side of the scheme, responsible for the “infrastructure.” The public figure remunerates this loss to the participants of the scheme, it is compensated in cash (in Ukraine) or through a network of offshore companies (abroad).

NBU has mentioned about such artificial formation of investment incomes, stating that Ukrainian public figures, their relatives and related persons legalize doubtful profits and use it in the process of declaring.

According to the regulator, banks should identify such operations, devoid of economic sense and block them on the basis of Article 10 of the Law of Ukraine "On prevention and counteraction to the legalization (laundering) of criminal proceeds."

Related: Ukraine's government approves Eurobonds issuance by Naftogaz worth $1 million

In general, we are facing the reincarnation of the good old scheme of Yanukovych’s (Ukraine’s ousted president, who fled to Russia, - ed.) times, which was left as a "trace" in the form of government bonds registered to offshore owners, recently "confiscated" in favor of the state. This was the so-called "tail of the scheme," which remained after multiple "scrolls." In general, it is not surprising, given that the personalities of the "investment bankers" have practically not changed in the past five years.

For many years, Ukraine’s government bonds have been used by the current political establishment as a tool to launder the proceeds of corruption. It has been serving as a base for the functioning of the rent-based model of the economy. Here, the bonds are kind of "exoskeleton," which helps legalize the corruption incomes. In the end, the bonds are redeemed and the scheme goes into oblivion, giving way to other "multi-steps" schemes. It turns out that there is practically no securities market in Ukraine, but there are very wealthy merchants whose income is no worse than the income of the Wall Street brokers.

Related: National Bank sets procedure for placement of municipal bonds on stock exchange

And the main thing for these “bonds lovers” is to constantly maintain the reputation of media people in order to become toxic for the law enforcement agencies. And in the case of opening criminal cases, they could yell about repression and the domination of security forces. On the other hand, this is because of we all "like" them, subscribe “to the news,” post enthusiastic comments... That is, we turn our financial system and the economy into a large field with “buried” gold coins, naively expecting that this time our "golden tree" will definitely grow. And it really grows. But in someone else's garden.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.  

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