Stealing a Billion

The report said Shor and his associates worked together in 2012 to buy a controlling stake in three Moldovan banks and then gradually increased the banks’ liquidity through a series of complex transactions involving loans being passed between the three banks and foreign entities.

The three banks then issued multimillion-dollar loans to companies that Shor either controlled or was connected to, the report said.

In the end, over $767 million disappeared from the banks in just three days through complex transactions.

A large portion of this money was transferred to offshore entities connected to Shor, according to the report. Some of the money was then deposited into Latvian bank accounts under the names of various foreigners.

Moldova’s central bank was subsequently forced to bail out the three banks with $870 million in emergency loans, a move designed to keep the economy afloat.

It’s an insider attack, where the insider is in charge.

What’s interesting to me is not the extent of the fraud, but how electronic banking makes this sort of thing easier. And possibly easier to investigate as well.

Tags: banking, fraud, insiders, Moldova

Posted on May 8, 2015 at 6:13 AM • 26 Comments

Comments

Sam • May 8, 2015 6:44 AM

Financial systems are infrastructure too, perhaps they shouldn’t be quite so closed.

https://xkcd.com/743/

This issue is a completely different scale to your profile photo being used in ads served to your friends though – the response isn’t “can you hear my little violin?” but instead “oh god our economy, please have $870m in bailouts”.

Peter • May 8, 2015 6:45 AM

CCBank in Bulgaria lost several billions through the same scheme – the bank owner (Tzvetan Vassilev) giving out billions in loans to offshore companies ultimately connected to himself. Recent data shows that 99% of the bank’s loans were bad. The supposed supervision by the central bank was non-existent.

Bob s. • May 8, 2015 7:10 AM

You got to admire the skill and boldness involved in stealing $767 million dollars, from a bank.

WOW!

At my bank, just down the street, they demand picture ID to DEPOSIT money, into my account, and charge me 75 cents for using a teller instead of the machine.

That’s another kind of wow.

Glenn Hyatt • May 8, 2015 7:15 AM

William K. Black deserves a nod here. He wrote the book The_Best_Way_to_Rob_a_Bank_is_to_Own_One:_How_Corporate_Executives_and_Politicians_Looted_the_S&L_Industry, in which I think he coined the term “control fraud” for this.

Cash is evil • May 8, 2015 7:46 AM

CAPTAIN OBVIOUS announces:

Cash is evil. Without cash, the world would be 100% secure.

Electronic banking is safe. Traceable electronic banking is the solution to all our financial security problems.

Please, join the anti-cash-coalition to make the world a better place. Cash is the root of all financial fraud threats.

Penny Pincher • May 8, 2015 8:08 AM

I hope Capt. Obvious is being sarcastic. My sarcastometer isn’t calibrated too well.

I read a book on the S&L scandal of the 1980’s called “The Best Way to Rob a Bank Is To Own One”. It was written by a guy named Black, who was (I think) in the GAO at the time. He calls these kinds of frauds “Control frauds”, where someone takes over a company and then using their power as boss, bleeds it out, or uses its credit to steal. It is a variant of bankruptcy fraud.

It is exactly what Keating and his ilk were doing then. They were fronted money by the Mafia to buy these banks, and then were making loans to mob-owned real estate development/construction companies. They would get about .1% of the loan amount as a commission, so for a million dollar loan that’s $1000 – they got rich but amount they were getting was dwarfed by the damage they did. I’m sure some of the loans were made to companies controlled by them or their friends, not just the mob. Also sometimes the same property would be sold several times in one closing, its appraised value (on paper) going up with each sale until they were lending much more than its real value.

What many people aren’t aware of is how close the US came to destroying the dollar by ignoring these control frauds for so long. We escaped by a very narrow margin. Black and his coworkers warned of it many times before they were paid any attention to.

Five US senators were accused in 1989 of corruption (The Keating 5) for attempting to obstruct the investigation of Keating’s bank. https://en.wikipedia.org/wiki/Keating_Five

And this is exactly the same kind of crap that got us in trouble in 2008 as well, only with residential real estate.

Penny Pincher • May 8, 2015 8:12 AM

Sorry Glenn Hyatt, I didn’t see your post when I posted.

Really? • May 8, 2015 8:24 AM

mr Schneier, how is this an insider attack if Shor is a citizen of Israel?

Captain Obvious • May 8, 2015 8:31 AM

@Penny Pincher

No, Sir, you’re wrong. I’m not sarcastic. I’m just obediant und submissive. The governments of the world tell me that cash is evil. I want to be a good follower and believe in everything a government says. I have the right to be a loyal follower.

If cash is outlawed, corruption, money-laundering, drug money, fraud and theft money, tax evasion – all these crimes will disappear. Only criminals need cash. That is what the governments tell me and I believe it. I have no reason to doubt something that a government says. The history of mankind confirms my beliefs.

Surveillance is security.
Surveillance is freedom.
Surveillance is the most important good of mankind.

Jayson • May 8, 2015 8:42 AM

I’d go with more of a statement that the complexity of the transactions makes the theft easier and horrible state of electronic banking is the tool used. Electronic banking today (not including cryptocurrencies) remains a large set of high-friction, human transactions with a thin veneer of technology.

Another major facilitator is the repeated support of this infrastructure through bailouts. There is no incentive to improve since banks don’t really fail, particularly if they are large.

Joe K • May 8, 2015 8:58 AM

In USA, bank robs you!

Lev Bronstein • May 8, 2015 9:35 AM

Keep in mind where the banks got that $767Million. It wasn’t from depositors. It wasn’t from the central bank. They created it ex-nihilo. And that wasn’t the crime here either. The only difference in this case and most every other bank is how they laundered the money back to those controlling. This is actually not even as bad as what Jon Corzine did at MF Global.

Ex-banker • May 8, 2015 9:41 AM

Anyone literate in the way modern finance works will tell you that this kind of stuff happens all the time. The above isn’t really that spectacular…

paul • May 8, 2015 9:56 AM

See also Akerlof and Romer’s “Looting” paper, which essentially shows that control fraud is the most economically rational behavior for a bank under certain circumstances.

We can also look at the 2007/8 crash as a result of control fraud, albeit a somewhat more distributed version. Nobody even got their bonuses rescinded.

rgaff • May 8, 2015 10:30 AM

@Captain Obvious

The Only Way You Can Be Safe Is To Walk Down To Your Local Prison And Check Yourself In. Your Omnipotent Government Says So. Believe It.

Nick P • May 8, 2015 12:02 PM

@ Glenn, Penny

Bruce posted on control fraud here a while back.

@ paul

That’s a good point. It’s in the bank and business owners’ interest to do whatever makes them the most money. A path where crime pays billions with low failure rate makes that the rational path to go on. The real problem is that the financial system even allows this type of stuff. I think legislation to deal with cases like this which focus on beneficiaries would be pretty easy to write. Yet, nobody is trying to do anything because they’re taking a cut.

TeeBee • May 8, 2015 12:39 PM

I bet the ties of this fraud are from Moskow.

65535 • May 8, 2015 12:53 PM

Tangentially, Control Fraud or Controlling Fraud is about concentrated control of a lot of assets. Data could be considered an asset.

If you think about the huge amount of data including all financial data flowing through the fibers, the collection of banking data including the SWIFT network one can see that the NSA is controlling an enormous amount of financial information – and the temptation of “insider manipulation” or “insider trading”.

https://en.wikipedia.org/wiki/SWIFT

It doesn’t take much imagination to think of ways the individuals working for the NSA could enrich themselves.

Nick P • May 8, 2015 1:06 PM

@ 65535

Good thinking. There’s already something like that in progress per one leaker. That person gave a hint but stopped short of full details. My guess is it’s a partnership between financial industry and intelligence. The financial industry gives them crucial information and support. The intelligence industry gives profitable information and/or protection in return. The CIA has worked closely with media and financial sector for a long time. This would just be an extension of that.

albert • May 8, 2015 1:49 PM

The entire World financial system is a fraud and run by thieves (even though their actions are ‘perfectly legal’). It’s certainly not a fault of electronic banking. In fact, it’s not even necessary to ‘game’ the ebanking system (though it’s possible).
.
An ‘open’, international, regulated system is the only cure for this situation.
.
…

tyr • May 8, 2015 2:17 PM

It was probably just a coincidence that Wikileaks
suddenly got a lot more reactive pressure when
Assange said he had the details of banking.

That suddenly upped the ante and they decided he
must be stepped on at all costs. Similar to the
way the world reacts to government drug smuggling.
If you start talking about those linked to the
protectors of right and good and true (intelligence
services) your days are numbered.

This is all quite interesting to watch as obvious
fraud continues to wreck the world but the drivers
of the system are viewed as impossible to change.

The shale of this planet is full of creatures who
were unable to adapt to circumstances, that is also
just a coincidence. When the arguments for economics
haven’t changed in 300 years it is a sign of serious
problems. One thing is sure you won’t fix this by
re-cycling the same bunch of mistakes.

Steve Friedl • May 8, 2015 7:51 PM

@Really?

How is this an insider attack if Shor is a citizen of Israel?

What does citizenship has to do with anything?

Citizenship says nothing about ownership or control (or residency, for that matter).

Coyne Tibbets • May 9, 2015 3:18 AM

@Really?: mr Schneier, how is this an insider attack if Shor is a citizen of Israel?

An insider attack is an attack perpetrated by someone having authorized access to the “system” being attacked.

As the owner of the bank, Shor had authority to direct activities that benefited himself. As such, he was an insider of the bank, even if he never actually set foot through the doors.

Glenn Hyatt • May 9, 2015 4:42 AM

@Nick P: It could well be I first learned the term “control fraud” by reading it here in 2010, but then I forgot. Thank you.

Wesley Parish • May 10, 2015 4:02 AM

Some Lebanese wit sent this to Uri Avneri in 2014:

Knowledge is Power!

During a recent robbery in Hong Kong, the bank robber shouted to everyone in the bank:
“Don’t move. The money belongs to the Government. Your life belongs to you.”

Everyone in the bank laid down quietly.

This is called “Mind Changing Concept” Changing the conventional way of thinking.

When a lady lay on the table provocatively, the robber shouted at her:
“Please be civilised! This is a robbery and not a rape!”

This is called “Being Professional”
Focus only on what you are trained to do!

When the bank robbers returned home, the younger robber (MBA trained) told the older robber (who has only completed Year 6 in primary school):
“Big brother, let’s count how much we got.”

The older robber rebutted and said:
“You are very stupid. There is so much money it will take us a long time to count. Tonight, the TV news will tell us how much we robbed from the bank!”

This is called “Experience”
Nowadays, experience is more important than paper qualifications!

After the robbers had left, the bank manager told the bank supervisor to call the police quickly. But the supervisor said to him:
“Wait! Let us take out $10 million from the bank for ourselves and add it to the $70 million that we have previously embezzled from the bank”.

This is called “Swim with the tide”
Converting an unfavorable situation to your advantage!

The supervisor says: “It will be good if there is a robbery every month.”

This is called “Changing priority”
Personal Happiness is more important than your job”.

The next day, the TV news reported that $100 million was taken from the bank. The robbers counted and counted and counted, but they could only count $20 million.

The robbers were very angry and complained:
“We risked our lives and only took $20 million. The bank manager took $80 million with a snap of his fingers. It looks like it is better to be educated than to be a thief!”

This is called “Knowledge is worth as much as gold!”

The bank manager was smiling and happy because his losses in the share market are now covered by this robbery.

This is called “Seizing the opportunity” Daring to take risks!

So who are the real robbers here?

Bob T • May 13, 2015 9:46 AM

“Shor has been charged with corruption and placed under house arrest…”

Moldova sounds like the place to be a criminal. I guess for murder, you get charged with assault and sentenced to 8 hours of community service.

Stealing a Billion

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