DEPOSITS WITHDRAWN FROM THE BANK AMID CENTRAL BANK GOVERNOR'S SILENCE AND ACO ĐUKANOVIĆ'S MOVE TO LUXEMBOURG: Who will rescue Prva Banka now?

Following the change of government three years ago, deposits held in the bank of the younger Đukanović began to ‘melt away’. The bank has survived thanks to substantial backing from the government, as well as deposits from state-owned enterprises, institutions, local governments and close businessmen. Auditors warned about the company’s uncertain future, while the Central Bank insists that everything is fine but withholds audit findings.

By Biljana Matijašević

As Prva Banka (First Bank) grapples with a new crisis stemming from its history of risky operations and the loss of its privileged market position after 30 August 30 2020, its major owner, Aco Đukanović, resides outside Montenegro following the collapse of the Democratic Party of Socialists (DPS) and is seeking to sell this company. For years, the Prva Banka has survived thanks to substantial backing from the government, as well as deposits from state-owned enterprises, institutions, local governments and and businessmen close to the Đukanović family.

Multiple sources confirmed to the Centre for Investigative Journalism of Montenegro (CIN-CG) that the brother of the former multiple prime minister and president of the country, Milo Đukanović, moved to Luxembourg shortly after the 2020 elections and has already embarked on new projects there.

The long-standing regime of the Democratic Party of Socialists (DPS) enabled Aco Đukanović and a certain number of affiliated businessmen to amass enormous wealth, often bypassing legal regulations, despite the fact that laws were written precisely for them. The wealth of the younger Đukanović has been estimated at several hundred million euros. Prva Banka is just one of the former state-owned companies that have fallen into Aco’s hands during years of dubious and partner privatizations led by the elder Đukanović.

Following the change of government three years ago, deposits placed in the Prva Banka began to dwindle, and the 2022 audit report highlighted significant uncertainties regarding the bank’s future operations.

“The potential cumulative effects of the issues raised in sections of our report entitled ‘Basis for a qualified opinion and emphasis of matter’ may directly impact the reduction of capital adequacy below prescribed minimums, as well as worsen other indicators and limits prescribed by the Central Bank, indicating the existence of material uncertainty that raises significant doubt about the bank’s ability to continue operating in accordance with the principle of going concern,” states the report from BDO, an independent auditing firm.

How deposits were dwindling

The new management of the Electric Power Company (EPCG), which is a significant shareholder in Prva Banka (around 20 percent), withdrew around 11 million euros in deposits from the bank immediately after the establishment of the new management and change of government. According to EPCG officials, the current balance in the deposit account at Prva Banka is around 1.6 million euros.

In 2019, the energy company had a total of 24 million euros in deposits (fixed-term and on-demand) in Prva Banka, which decreased to around 20 million euros in 2020. According to audit reports, EPCG reduced its deposits in Aco Đukanović's bank to 14.5 million euros in 2021, and further to 8.8 million euros in the previous year, leaving only 1.6 million euros in the account now.

In 2010, the state-owned energy company granted Prva Banka a subordinated loan of 10 million euros to overcome liquidity problems. The loan was reduced to six million euros through several annexes, with the last annex signed by the former management of EPCG in 2020, postponing the repayment until 1 April 2028.

EPCG recalls that last year they requested approval from the Central Bank of Montenegro (CBCG) to withdraw the subordinated loan, but the regulator did not allow it. The CBCG previously explained that such action would jeopardize the bank’s operations.

“The total income of EPCG from accrued and paid interest on the subordinated debt, as of 31 March 2023, amounts to approximately 6.5 million euros,” EPCG officials told CIN-CG.

At the end of 2019, Prva Banka had deposits of around 340.8 million euros. By the end of 2020, following the fall of the Democratic Party of Socialists (DPS), customer deposits decreased to 301.7 million. In 2021, they further dropped to 258.4 million euros. However, by the end of last year, deposits at Prva Banka had increased to approximately 285.3 million euros, but this still represents a significant outflow compared to the time of the elder Đukanović’s rule.

Significant amounts of deposits in Prva Banka were also held by EPCG’s subsidiaries – the Montenegrin Electric Distribution System (CEDIS), as well as the companies majority-owned by EPCG – the Coal Mine and Zeta Energy. Deposits were also held by Pivara Trebjesa, Sports Facilities LLC, the Student Dormitory and Student Centre in Nikšić and the Municipality of Nikšić. 

Of those, significantly reduced deposits were held only by EPCG, CEDIS, Zeta Energy and Coal Mine in the last year. For example, in 2019, CEDIS had a total deposit of 20 million euros, while by the end of last year, it was reduced to only 3.5 million euros.

The deposits of Coal Mine amounted to 3.2 million euros in 2019, falling to 675 thousand euros last year. Zeta Energy reduced its deposits from 953 thousand euros in 2019 to a symbolic one thousand euros last year.

CBCG witholds audit findings

The Central Bank of Montenegro (CBCG) conducted an audit of Prva Banka last year, but the institution, still managed by Radoje Žugić, a trusted figure of the former regime and former director of Aco Đukanović’s bank, refuses to disclose the findings. Žugić’s term of office has expired, but due to political disagreements, a new governor has not yet been appointed, so he continues to lead this institution, which he took over in 2016. He also headed the institution between 2010 and 2012.

“The information regarding the findings of the bank audit, as well as any potential measures to be implemented, is confidential,” the CBCG told CIN-CG.

Goran Knežević, a banking expert and former deputy director-general of the CBCG, says that, to his knowledge, the CBCG conducted an audit of the bank at the end of last year and the beginning of this year, and allegedly found nothing irregular.

According to him, the audit findings by the CBCG regarding Prva Banka reportedly indicate that the bank’s operations are compliant with the law, based on good practices and stable. He mentioned that the cut-off date for an assessment was the end of November, rather than the end of the year.

“In line with the new Law on Credit Institutions, CBCG is required to disclose any disciplinary measures imposed on banks, if any. If none are imposed, it should mean that everything is in order,” he explains.

The CBCG says that Prva Banka is operating within the regular regime. It is liquid and there are no outstanding orders.

In response to CIN-CG’s inquiry about whether EPCG will continue to support Prva Banka as in the previous period, the energy company said that Prva Banka, in its semi-annual report, indicates that there are no operational issues and that liquidity is at a satisfactory level, enabling uninterrupted operation, adding that the bank operates without any restrictions regarding loan approvals.

An analysis by CIN-CG has revealed that Prva Banka has not received a positive report from independent auditors for over a decade, which should have been a warning signal for the regulator, the Central Bank, to take stricter measures.

In their reports of auditing firms over the past 12 years (earlier reports are not available on the Central Bank’s website), audit companies generally highlight the same issues – a high level of non-performing loans, non-compliance with regulatory requirements and international auditing standards, underestimated or overestimated balance sheet items, leading to a misrepresentation of the true financial performance.

A source familiar with the situation at Prva Banka (name known to the editors) stated that the bank had previously warranted a negative opinion from auditors, “but no one dared to write it,” given that it is owned by the brother of Milo Đukanović, who himself once held shares in the bank. It is known that he earned his first legal million by selling those shares.

The source indicated that the bank did not adjust to banking regulations in Montenegro; instead, the regulations were “adjusted to it”. In other words, the Central Bank relaxed regulations to tailor them to Prva Banka.

Goran Knežević told CIN-CG that analysing the performance of this bank, one can conclude that it would be desirable for Prva Banka to change its business model, risk management system and corporate culture.

“Those who build one culture rarely change it, unless they themselves undergo intensive change. Typically, a new culture needs to be introduced by someone else, or an inadequate business culture ultimately results in the system’s demise,” Knežević notes.

He confirmed that after 2008, when Prva Banka faced its first major crisis, bank controls were ‘relaxed’.

Measures and performance data also remain under the veil of secrecy

Asked about why stricter measures were not taken against Prva Banka, given the fact that it has not received a positive auditor’s opinion for over a decade, the CBCG told CIN-CG that information regarding the findings of bank business controls, as well as the implementation of measures, is confidential and can only be provided to the competent state authorities.

Ines Mrdović, director of the Action for Social Justice (ASP), told CIN-CG that actual control of the bank’ operations by the supreme monetary institution has never been undertaken, and those who attempted it previously were quickly removed.

“It was simply an ‘untouchable’ bank to which state interests were subordinated due to strong political and nepotistic connections, so there is a big question mark about whether auditors received truly relevant data from the bank’s management in such an environment, and how they were able to provide relevant assessments of the bank’s condition," she notes.

Mrdović believes that since the 2008 financial crisis, during which the bank was assisted with 44 million without consulting the public, and a year later, when tens of millions of euros were deposited into it from the sale of part of the government’s stake in EPCG to prevent bankruptcy, the true business figures of the bank are still largely shrouded in ‘a veil of secrecy’.

Prva Banka was founded by taking over the state-owned Nikšić Bank in 2006, and within a few months under the control of the Đukanović family, it grew by several dozen times. It immediately began to serve, as reported by the BBC, as an ATM machine for the ruling elite and their friends, some of whom received multimillion-dollar loans without proper collateral.

Before the crisis and state aid in 2008, the regulator had imposed measures on Prva Banka due to identified liquidity problems. At that time, the bank was required to cease granting loans that did not comply with regulations. However, according to audit reports, the bank did not adhere to the measures imposed by the Central Bank of Montenegro (CBCG), under which it was effectively operating only nominally for two and a half years.

In 2008, Prva Banka managed to avoid collapse with the help of the state following the enactment of special legislation, allegedly due to the global crisis, and by approving a loan of 44 million euros from the state budget. The bank repaid the loan in instalments, but doubts arose in some quarters about the authenticity of the repayment. The first instalment was repaid by transferring 11 million euros in 11 consecutive transactions on 13 March 2010, following the inflow of deposits from the state-owned Regional Waterworks, also in 11 transactions of one million euros each. This was confirmed by the auditor.

Due to suspicions regarding the regularity of the loan repayment to the state, several criminal complaints were filed against Prva Banka and some former members of the government. The complaints were filed by MANS, the CBCG and the Movement for Changes. Prva Banka at the time denied allegations that they had unlawfully repaid a portion of the loan to the government.

The Special State Prosecutor’s Office did not respond to CIN-CG’s questions regarding the criminal complaint filed in 2020 by the Democratic Montenegro, the Pensioners’ Party and the Pensioners’ Union. The previous criminal complaint filed in 2012 was dismissed by the Supreme State Prosecutor’s Office, led by Ranka Čarapić. That complaint was filed by the CBCG due to suspicions of irregularities in business operations when Ljubiša Krgović was at its helm. He was dismissed from that position after opposing the Đukanović family.

It will be difficult for someone to buy a bank burdened with problems

During the era of the DPS, the bank was effectively supported by the Montenegrin Electric Power Company (EPCG) through deposits, recapitalization, approval of subordinated loans and through million-dollar transactions during the sale of a part of the EPCG to the Italian company A2A. The sale of Montenegro’s most valuable company was negotiated by the elder Đukanović.

Thanks to the EPCG, Prva Bank managed to maintain the legally prescribed level of capital. Following the latest auditor’s report for 2022 and the expressed qualified opinion, there have been discussions about selling the bank.

Media outlets from Serbia and Montenegro reported in July that the Postal Savings Bank of Serbia was interested in acquiring Prva Banka, but this news was quickly denied. The Central Bank says they have not received any formal notification regarding the intention to purchase the shares of Prva Banka, claiming that the EPCG is also not aware of such information.

In the 2022 report on Prva Banka, the auditor stated that there is interest in acquiring a majority stake in the bank “by strategic investors from Europe and the region.”

“According to the bank’s management, some of the offers could be implemented in the short term, creating the necessary conditions for the survival and further development of the bank,” the report states.

CIN-CG has reached out to several banks in Europe and the region, all of which said they were not considering the purchase of Prva Banka. Prva Banka did not respond to CIN-CG’s inquiries regarding whether they are conducting negotiations for selling the bank and with whom.

An insider familiar with the matter points out that the talks about the sale of the bank have been ongoing for more than a decade, so it will be challenging for anyone to acquire it due to liquidity issues.

As early as in 2011, according to media reports, negotiations were underway for the sale of Prva Banka to Russian banker Vladimir Antonov, who was suspected of embezzlement in Lithuania’s Snoras and Latvian Krajbanka, as well as financial irregularities involving the HSBC bank.

Prva Banka was in negotiations for sale with the royal family of Al Nahyan from the UAE in 2008 and 2013, but those attempts were also unsuccessful.

At the end of last year, the bank had 280 shareholders, with the largest being Aco Đukanović, holding 41.46 percent and EPCG holding 19.76 percent. However, the owners of a total of 11 percent of shares are concealed behind aggregate custody accounts at Hipotekarna Bank (4.48 percent), Prva Banka (3.44 percent), and CKB (3.1 percent).

Aco is now increasing his deposits

NGO Action for Social Justice (ASP) announced in late August that Aco Đukanović withdrew his deposits when seeking state assistance in 2008.

According to ASP data, Aco Đukanović’s fixed-term deposits fell from 18.1 million euros at the end of 2008 to 4.3 million euros. His deposits continued to decrease, so by 2019, according to the auditors’ report, he had not held any deposits at Prva Banka under his name.

Since leaving the country, however, the younger Đukanović has been injecting deposits into his bank over the past three years, while others were withdrawing, as shown by the audit reports. In 2020, he had a deposit in the bank amounting to 956,000 euros, and by 2021, this sum had grown to 1,127,000 euros. In the same year, a microcredit company owned by Prva Banka, Montenegro Investment Credit, deposited 806,000 euros in Prva Banka. The 2022 audit report states that Aco Đukanović’s deposit amounted to 1.8 million euros, while Montenegro Investment Credit reduced its deposit to 514,000 euros.

Since the state no longer injects money into the bank that has been privileged for years, it is evident that the younger Đukanović now has to inject his own money to save the bank’s liquidity and prepare it for sale. Considering how much money they have taken from the state, these deposits are only symbolic amounts for the family.

CIN-CG requested copies of the 2008 and 2009 control reports on Prva Banka from the Central Bank, but the request was denied on the grounds that they constitute business secrets.

Through the freedom-of-information platform developed by MANS, CIN-CG also requested a separate 2009 audit report by the PriceWaterhouseCoopers (PwC), ordered by the Central Bank. However, the Central Bank also declined this request, stating that they do not have it. The PwC did not complete the audit, which remained in a draft form. This, as Krgović stated in his statement to the prosecution service in 2014, is one of the most severe qualifications for a bank.

Asked by CIN-CG whether the Central Bank destroyed documentation on the operations of Prva Banka for 2008 and 2009, they said that they “do not destroy documentation on bank operations, and it is available for inspection by third parties in accordance with the law.”

“When it comes to archiving and storing documentation, the Central Bank acts in accordance with the Law on Archival Activities and the List of Categories of Central Bank Registry Material approved by the State Archives of Montenegro,” they said.

Parts of the draft audit report by PWC were published in 2012 by the regional network of investigative journalists, the Organized Crime and Corruption Reporting Project (OCCRP). The report revealed that Prva Banka approved nearly two-thirds of loans to related parties, where it not only violated its internal rules but also laws and other regulations, causing harm to itself in favour of providing special treatment to VIP firms and individuals.

One example involves foreign companies associated with businessman Zoran Bećirović, a friend of Milo Đukanović. Central Bank inspectors established in 2007 that the bank, without obtaining all the necessary information and documentation, opened accounts for Beppler and Partners, registered in the British Virgin Islands, as well as Caldero Trading, Beppler Property and Development and Beppler Investments, registered in Cyprus.

In 2014, the OCCRP also reported that Prva Banka conducted business with the convicted drug lord Darko Šarić and his associates, allowing them to take out loans under favourable conditions through accounts at the bank, which raised justified suspicions of money laundering.

“In its dealings with Šarić and Rodoljub Radulović, or their companies, Prva Banka violated the law and internal regulations, granting them loans in violation of prescribed procedures and without adequate collateral to ensure repayment. For instance, when opening accounts for Lafino Trade LLC in the US state of Delaware and for Camarilla Corporation in Seychelles, Prva Banka failed to obtain valid registry extracts or copies of personal documents for individuals with access to the accounts. In this way, Prva Banka breached the Law on the Prevention of Money Laundering and Terrorism Financing,” the OCCRP reported.