Fictitious Assets, Hidden Losses and the Collapse of MDM Bank

Photo Source MAXmyd | CC BY 2.0


Off Balance Sheet Shenanigans in the Irish Financial Services Centre 

Introduction

In November 2016, two of Russia’s largest banks MDM and B&N completed a merger. This new entity now ranked (by size of assets) in the top 10 of all Russian banks and the top 5 for private lenders. Following the merger CEO Mikail Shishkhanov declared, ‘We have laid the foundation for the creation of an international-class bank’.[1] Yet a mere 10 months later it required a bailout in what could be one of the mostly costly rescues in Russian banking history. [2] Mr Shiskhanov blamed these difficulties largely on MDM, whose losses ‘turned out to be much more serious than assumed in the conditions of a falling market’. [3]

How had those tasked with assessing MDM’s health prior to the merger failed to recognise such problems? Part of the answer lies 6000 kilometres away in the Irish Financial Services Centre (IFSC), via Ireland’s large shadow banking sector. Irish registered special purpose vehicles (SPVs), or shell companies in common parlance, have become widely used by Russian MNEs for off balance sheet financing and wider tax/regulatory avoidance. Between the years 2005-2016 around €110 billion was raised by Russian connected vehicles in the IFSC, [4] with Russian banks also using it as a location to hide losses. [5]

Concerned with the latter usage, this article examines MDM’s use of several IFSC based vehicles as part of a scheme that…

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