About bank fraud

Banking sector problems still cause concern of the business community. It is not uncommon and influences business badly, when the next day after signing the agreement with contractor and money transfer into his account, it comes out that partner bank`s license is revoked. That is why it is necessary in estimating of the future contractor to check the financial stability of his credit organization. It is possible to do with the help of the Information and Analytical system Globas.

According to the Bank of the RF, on July 1, 2017 in Russia 947 credit organizations (CO) are registered. Among them: 591 CO having right to carry out banking operations; having licenses (permissions) to attract private deposits – 491 CO, to carry out operations in foreign exchange – 381 CO; with general license – 196 CO.

According to the analytics, in general, in Russia about 100 banks at average are closed annually. Besides, 80% of banking licenses were revoked because of criminal activities of owners and managers. Only for the last three years fraud bankers stole from depositors about trillion RUB. Inadmissibility of such situation was the main topic for discussion at the meeting of the interregional banking Council of the Federation Council on June 26, 2017.

At the meeting of the Council the most popular fraud schemes were marked: financing of own holders, overstatement of assets and false capitalization. Also immediately before bankruptcy bank assets are often turned into unsecured assets and promissory notes of nonexistent companies. Even the toughening of prohibition for the falsification of accounts does not restrict fraud bankers.

Among fraud schemes experts distinguish:

  • Opening of the off-balance accounts
    Banks open accounts off the books; money are taken from physical persons; in case of аlicense withdrawal account data are not included in the refunding procedure through the endowment insurance Agency.
  • Investment of funds to the correspondent accounts of foreign contractors
    Non-disclosure of leg of transaction related to the investment of funds abroad; similar schemes can be applied to securities.
  • Creation of non-real debtors
    Large amount of legal entities are founded, agreements are madebetween them, however, actual activity is not carried out. Special programs of a fraud bank watch in order to borrow money from one debtor a proper time and transfer it to another one to pay the debts and credits in time. The Central Bank determines such firms by payment of minimum amount of taxes be large amount of debtors at the same day.
  • Loan granting to retail debtors
    Clients of other banks are used as debtors; loan servising of such debtors, as a rule, is carried out without expiration to certain time.
  • Manipulations with deposits
    Bank uses funds of a depositor for own benefit, without informing him; or contracts with nonexistent depositors about transfer of funds through cash, that are derived from bank by loan granting later.

At the meeting of the interregional banking Council of the Federation Council measures against such fraud were suggested.

Among them:

  • to foresee the possibility of property arrest of a collapsed bank before the court takes decision on refunding or comeback to bankruptcy assets of the property that was output before withdrawal of bank license;
  • to strengthen criminal liability both for an owner of bank and for a cashier, for example, by increase of deprivation term in case of satisfied intentional fraud, falsification of bank documents, funds withdrawal, deception of depositors and the state;
  • and other measures.

Besides, the Central Bank of the RF suggests foundation of the unified register of depositors and affords the access by means of the State services web portal. However, question about when and how it will be realized is still open. Among benefits the enactment is marked that regulates refunding of banking deposits for small and medium business in amount to 1,4 mln RUB through the endowment insurance Agency in case when neglectful bank is closed.

Fly-by-night companies fine off

For the first time in Russia, the Unified State Register of Legal Entities (EGRUL) is being “cleaned” from the statistical companies. The Federal Tax Service (FTS) began to implement this program in 2016, and following the results of 2017, striking the fly-by-night companies off the register will be continued. On 01.06.2016 there were 4,8 mln active organizations, and on 01.06.2017 the number reduced by 5,7% and amounted to 4,5 mln. In relative figures, most of all legal entities decreased in Murmansk region – 14,8%, Chelyabinsk region – 13,8% and Moscow – 11,8% (see Table 1).

Such a rapid reduction is not a result of negative processes in economy: according to preliminary estimates, growth of the GDP of Russia in Q1 2017 is 0,5%; key industries – trade and construction – are recovering, as well as industrial production is increasing. The main reason of reduction is to be sought in purposive exclusion of fly-by-night companies from EGRUL.

Table 1. Regions with the largest relative decrease in the number of legal entities
Region Number of active legal entities on 01.06.2016 Number of active legal entities on 01.06.2017 Reduction for the year, %
1 Murmansk region 21 187 18 047 -14,8
2 Chelyabinsk region 113 031 97 427 -13,8
3 Moscow 1 090 657 961 590 -11,8
4 Novosibirsk region 137 810 122 294 -11,3
5 The Republic of Kalmykia 4 921 4 388 -10,8
6 Khanty-Mansi autonomous district - Yugra 40 263 36 314 -9,8
7 Tomsk region 35 004 31 572 -9,8
8 Oryol region 15 707 14 171 -9,8
9 The Republic of Mari El 15 482 14 131 -8,7
10 Volgograd region 51 307 46 830 -8,7
  The Russian Federation 4 781 592 4 510 689 -5,7

As explained by Dmitry Grigorenko, deputy head of the FTS, taxmen remove companies, which do not provide any financial reports for a year and beyond and have no account activity. According to various estimates there are 600-700 th fly-by-night companies in Russia; that is 13-16% of total number. That is to say one in ten companies could be statistical, that is why verification of potential partners before closing of deals is crucial for economic security provision.

Several years ago the situation was much worse: in 2011 there were about 1,8 fly-by-night companies or 40% of total number, that is 2,6 times more than now. It is obvious that strike against dubious organizations works. There is also a tendency of shorten the life of such companies: if earlier they could carry out illegal operations for years, now, as a rule, the company is abandoned after 1-2 "transactions" and it no longer shows any signs of activity.

The need for information is especially increased when cooperation with a new counterparty is planned. To reduce the risk of financial loss and involvement in a fraudulent scheme, it is necessary to check all possible information about a potential partner. If the FTS discovers that the counterparty is a fly-by-night company, the transaction with it will be deemed to be directed at obtaining an unreasonable tax benefit. In this case, the exclusion of transaction costs from the income tax base and referring to VAT offset are recognized illegal. As a result, if there is a fact of cooperation with a fly-by-night company, additional taxes will be charged and a claim for payment of a fine and penalty will be raised.

The Tax Service is constantly improving the regulatory framework for struggle against fictitious companies and identifying their signs. Here are the most important documents: Order No. MM-3-06/333@ of the Federal Tax Service of 30 May 2007 and Order No. MMV-7-14/72@ of the Federal Tax Service of 11 February 2016, which recorded signs of a fly-by-night company and measures for their detection. Analysis of the Russian arbitration practice found the most common signs (see Picture 1).

Picture 1. Signs of a fly-by-night company most often found in the materials of arbitration cases Picture 1. Signs of a fly-by-night company most often found in the materials of arbitration cases

Extract from EGRUL confirms the fact of state registration of the company in accordance with the established procedure, but it cannot automatically be sufficient confirmation of "due diligence and caution" of the taxpayer when choosing a partner for cooperation. Further verification through the professional information system is necessary.

Globas users have an opportunity to quickly verify the counterparties using Reliability index, which evaluates the negative signs and takes into account the recommendations of the FTS on identification of fly-by-night companies.

According to Globas, currently the number of companies with negative signs is 10-13% of the entire amount of organizations, which corresponds to official statistics. Reliability index is calculated for all Russian enterprises of the real economy.