ATLAS AFFAIR: CENTRAL BANK FAILED TO ACT AMIDST WORST CRISIS

When the Central Bank of Montenegro (CBofM) annual audit reports on Atlas Bank came to light someone could only wonder what on earth the CBofM was doing. The CB has jeopardized hundreds of millions of euros deposited in the banks of Dusko Knezevic (Atlas Bank and Investment Bank of Montenegro- IBM) by failing to regulate some highly risky banking. Thus private individuals, companies and institutions found themselves in precarious situation. The CB governor Radoje Zugic is expected to regulate the banking sector. However, his indolence became a huge liability. Furthermore, he has put the whole banking system of Montenegro at risk. The collapse thereof cannot be ruled out if no action is taken.

CBofM audit report 2018 on Atlas Bank

The CB report of 14 Nov 2018 states that on the first day of control (31 May 2018) the solvency ratio stood at 8.45%. Although the solvency ratio was bellow the prescribed 10% the CB reports that Atlas Bank was servicing all its liabilities and was solvent despite ongoing problems.

The second check took place on 30 Sep 2018 and the CB reports drastic fall of solvency, all the way down to 2.97%. That was very close to the red line of 2.5% which would automatically trigger bankruptcy procedure as set forth by the Banking Law. According to the CBofM report that CIN-CG and Vijesti had access to, two events precipitated the aforesaid plummet.

The first event took place on 12 June 2018 when the Special Prosecution Office (SPO) blocked €63 million over alleged tax evasion through E-commerce. Later on, the SPO changed the mind and accused Knezevic’s Atlas Bank for money laundering through the same E-commerce. The CB then explains that, as the result of the SPO action, the blocked amount had to be removed from the balance sheets. Thereby the liquidity plummeted bellow the red line. The CB auditors further stated that the E-commerce was the most profitable part of the Atlas banking operations which generated the bulk of its revenues. Some other banks in Montenegro also provide similar service. However Dusko Knezevic developed this line of business beyond and above everyone else in the country.

The second event that disrupted the bank’s business was the loss of €15.2 million in July 2018 due to disputed loan guarantee to Kaspia Property Holdings, a Dubai-based company. The court in Montenegro ruled in favour of Kaspia and ordered transfer of the disputed amount from Atlas Bank to Kaspia’s account with Prva Bank (owned by the ruling Djukanovic family) so as to compensate the Azerbaijani company. Dusko Knezevic claims that Dubai-based Kaspia is actually owned by an Azerbaijani minister with whom he had considered certain business proposals. He asserts that Atlas Bank had never issued any loan guarantee but only a draft thereof.

However, the CB admits in its reports that Atlas Bank did manage in a few months of 2018 to reduce the amounts of risky loans (more than 90 days past due) from 30.85% in May down to 23.7% in Sep 2018.

There’s more to it. Special Prosecutor Katnic had blocked the bank’s €63 million. Nonetheless the Central Bank explains that “as we write this report the bank has no outstanding payments“ Therefore Atlas Bank was paying all its dues up to the end of 2018. The CBofM further states that there were no problems with payment operations but warns that problems may arise in the near future.

CBofM: Prosecutors harm the bank’s reputation

After the aforesaid events, the bank could not maintain its liquidity. It neither had short-term securities nor bonds which it could sell “while borrowing from other banks was highly difficult because of its tarnished reputation“- the report says. The CB auditors thus expect exacerbation of the liquidity problems and growing numbers of deposit withdrawals.

Furthermore, Radoje Zugic (the CB governor) cannot assert anymore that Atlas Bank will be spared from bankruptcy. If worse comes to worse the losses will skyrocket into hundreds of millions of euros. The Deposit Protection Fund (DPF), bank depositors and Montenegrin tax payers will have to bear the brunt. Just a few weeks ago Zugic boldly stated that Atlas Bank and IBM would not face bankruptcy. He further stated that after 45 days of moratorium expire all deposits would be unlocked. He soon trampled his own assurances. The IBM has gone bankrupt although its parametres were better than those of Atlas Bank.

CBofM audit report 2015 on Atlas Bank

When the last CB report (2018) is compared with the 2015 report it becomes clear that Atlas Bank parametres were significantly worse in 2015 than in 2018 (even after all the blows that it took). However, before we proceed with comparative analysis we must warn of a possible bias in the 2018 report. We wonder if the last report is entirely reliable or maybe the CBofM tailored the report so that the bank may evade the bankruptcy. Economic expert Mila Kasalica in her analysis (which we have published before) put the solvency ratio as low as negative 22%. She bases her calculations on the 2017 audit report and subsequent developments.

The team of then vice-governor Velibor Milosevic published the 2015 report. On 30 Sep 2015 the solvency ratio was negative 12.39%. The report mentions that the bank started certain reforms at the time of the audit but the auditors estimated that those measures could only lift the solvency up to negative 7%. The auditors stated that Atlas Bank had overrated the bank capital. They further noted a high liquidity risk and thus concluded that the bank “may not carry on for much longer“. Lastly the auditors were concerned with the risky loans to Atlas Group of companies and/or those linked to the group while on the other hand those companies were not among the big Atlas Bank depositors.

Vice-governor Milosevic requested temporary administration in Nov 2015

The vice-governor Milosevic officially proposed to the CB management the imposition of temporary administration upon first control findings on 10 Nov 2015. He stated that the temporary administration was the only solution “which at this moment can help the system to some extent, that is to save it from liquidity outflow“. However, neither Milosevic’s opinion nor the final auditor's findings of 25 Dec 2015 were enough to implement temporary measures. According to a source who wanted to remain unnamed, the control report was presented to the Fiscal Stability Council (whereof the then finance minister Radoje Zugic was a member). The report was neither rejected nor endorsed.

Despite the turmoil in Atlas Bank, the Central Bank under governor Zugic (who arrived in Sep 2016) neither introduced the temporary measures nor conducted an in-depth control of the bank until June 2018. It’s interesting that auditing control was launched on 11 June 2018 which was one day before the Special Prosecution Office blocked €63 million of the bank’s deposits. It’s also intriguing that the control lasted a way beyond usual two to three weeks and dragged on for five months. Thus any solution was delayed.

Had the request of Milosevic been accepted (in late 2015) the crisis and the consequences thereof would have been far less severe for the whole system. The proposed measures of 2015 made more sense than the current ones since they would have targeted the culprits and would have left alone the small depositors and customers who had nothing to do with Atlas Group. Thus the banking operations would have been continued. The companies of Atlas Group and the connected parties would have been denied credit lines, internal transactions and access to deposits. Furthermore the measures envisaged expenses cuts and no dividend payments. On the other hand, the unrelated depositors would not be restricted save for termed deposits which could not be withdrawn before maturity.

The checkers identified the key problem then- the bank money outflow facilitated by the companies connected to Atlas Group. Had the practice been suspended the bank would have been in a much better shape. The Central Bank measures of 2018 are a way more rigid and have paralised the bank. All deposits have been blocked. More than a hundred thousand of bank customers won’t have access to the money for a long time. So those who pay the price are small depositors, companies, municipal governments and public sector. They have hundreds of millions locked in the bank.

Nonetheless, it’s worth noting that the companies related to Dusko Knezevic have hardly any money blocked in the bank. According to the last year audit report, Atlas Group related companies had only €1.3 million deposited in the bank, which is 0.7% of the overall deposits. That shows that Knezevic’s companies did not keep the money in Atlas Bank. However the bank did approve loans to risky and loss making companies connected to the group. Had the Central Bank of Montenegro promptly intervened things might have been very different.

What else is at stake

The CB is buying time with the capital increase talk. It delays introducing bankruptcy procedure in Atlas Bank and thus payments to small depositors from the Deposit Protection Fund (DPF). The sum is €90 million. The payout of that magnitude would empty the DPF which in the next few days should also start paying €22 million to small depositors of IBM due to bankruptcy. The empty DPF could further endanger the banking system as commercial banks and the state budget should cover for the payout.

Now Atlas Bank is not under Dusko Knezevic’s control anymore whether is survives or enters bankruptcy. Special Prosecutor Katnic has launched an investigation and blocked the money thereat. Moreover the Central Bank has imposed temporary measures and a few days ago called the current shareholders to recapitalise the bank and raise €22 million by issuing new shares. The temporary administrator lowered the nominal value of a share from €500 down to €248 each which is the price for new 88,000 shares. Since Knezevic is unlikely to take part in the recapitalisation then whoever buys the new shares will become the majority owner. Currently the bank’s share capital is divided into 64,000 shares.

It remains to see how much this conundrum will cost Montenegro. The depositors and the country’s budget will be directly affected. However, the Central Bank’s lousy regulation policy will certainly have harmful effects on the whole country. The World Bank itself often warned of the consequences. After all, the country’s credit rating may go down thus making the country’s borrowing abroad more expensive. Furthermore that will trigger the rise of domestic interest rates, thereby putting an extra burden on the economy.

If the confidence in the banking sector plummets that will certainly trigger the flight of deposits from other banks also. The banks will have higher operating costs which will also mean higher interest rates. The increase of bank premiums to be paid to the Deposit Protection Fund will directly impact the operating costs of the banks. The premium rate was lower over the last years since the DPF was in good shape. On the other hand as businesses become riskier so will the DPF premiums become more expensive.

Atlas Bank deposits portfolio: private individuals- 109 million, private companies- 56 million, the state owned enterprises and institutions- 10.5 million

According to the 2017 auditing report, private individuals’ deposits in the bank amounted to €109 million of which €33 million were long-term deposits. After the imposition of the temporary crisis measures in late 2018, some €109 million of private individuals were blocked in the accounts. Private companies had around €56 million on Atlas accounts at the end of 2017. International companies which were doing business through the bank had €14 million in deposits which are now frozen. The national government and state owned companies had €10.5 million while municipal governments kept €5 million thereat.

On the other hand, the 2017 report states that the debt of Atlas to the state owned Investment Development Fund (IDF) amounted to almost €8.5 million while the debt to the European Investment Bank (EIB) amounted to €8.9 million. The later amount is guaranteed by the state so the tax payers may foot the bill at the end of the day.

The Central Bank of Montenegro failed to send money laundering alert in 2015 and 2018

The Special Prosecution Office suspects the Atlas Bank of laundering more than €500 million over the last eight years. However, the CB control reports contain no warnings when it comes to possible money laundering. The 2015 control report says that the bank complies with the anti money laundering regulations, that it had endorsed internal acts and procedures and that it sends cash transaction reports on a regular basis and in accordance with the law.

The annual report for 2018 contains the same conclusions despite certain discords that it referred to. Nonetheless, the report has no doubts about the bank’s proper conduct. Thus the report mentions two cases where the real company owners had to be confirmed from the updated registry, then two cases of company owners who didn't have new ID documents and six companies which were not rechecked annually. There was also one case of lost contract.

The CBofM management recently said at the parliamentary hearing that the report had been sent to the Administration for Prevention of Money Laundering but not to the Special Prosecution Office. That means that the auditors had not discovered any fishy transactions which could hint to money laundering. Only then the state prosecutors could step in.

Goran KAPOR / Milka TADIĆ-MIJOVIĆ