Strange, penumbral, characters roam the boardrooms of
banks in the countries in transition. Some of them pop
apparently from nowhere, others are very well connected
and equipped with the most excellent introductions. They
all peddle financial transactions which are too good to be
true and often are. In the unctuously perfumed propinquity
of their Mercedesed, Rolex waving entourage - the
polydipsic natives dissolve in their irresistible charm and
the temptations of the cash: mountainous returns on
capital, effulgent profits, no collaterals, track record, or
business plan required. Total security is cloyingly assured.
These Fausts roughly belong to four tribes:
The Shoppers
These are the shabby operators of the marginal shadows
of the world of finance. They broker financial deals with
meretricious sweat only to be rewarded their meagre,
humiliated fees. Most of their deals do not materialize.
The principle is very simple:
They approach a bank, a financial institution, or a
borrower and say: "We are connected to banks or
financial institutions in the West. We can bring you
money in the form of credits. But to do that - you must
first express interest in getting this money. You must
furnish us with a bank guarantee / promissory note / letter
of intent that indicates that you desire the credit and that
you are willing to provide a liquid financial instrument to
back it up.". Having obtained such instruments, the
shoppers begin to "shop around". They approach banks
and financial institutions (usually, in the West). This time,
they reverse their text: "We have an excellent client, a
good borrower. Are you willing to lend to it?" An
informal process of tendering ensues. Sometimes it ends
in a transaction and the shopper collects a small
commission (between one quarter of a percentage point
and two percentage points - depending on the amount).
Mostly it doesn't -and the Flying Dutchman resumes his
wanderings looking for more venal gulosity and less legal
probity.
The Con-Men
These are crooks who set up elaborate schemes ("sting
operations") to extract money from unsuspecting people
and financial institutions. They establish "front" or
"phantom" firms and offices throughout the world. They
tempt the gullible by offering them enormous, immediate,
tax-free, effort-free, profits. They let the victims profit in
the first round or two of the scam. Then, they sting: the
victims invest money and it evaporates together with the
dishonest operators. The "offices" are deserted, the fake
identities, the forged bank references, the falsified
guarantees are all exposed (often with the help of an
inside informant).
Probably the most famous and enduring scam is the
"Nigerian-type Connection". Letters - allegedly composed
by very influential and highly placed officials - are sent
out to unsuspecting businessmen. The latter are asked to
make their bank accounts available to the former, who
profess to need the third party bank accounts through
which to funnel the sweet fruits of corruption. The
account owners are promised huge financial rewards if
they collaborate and if they bear some minor-by-
comparison upfront costs. The con-men pocket these
"expenses" and vanish. Sometimes, they even empty the
accounts of their entire balance as they evaporate.
The Launderers
A lot of cash goes undeclared to tax authorities in
countries in transition. The informal economy (the
daughter of both criminal and legitimate parents)
comprises between 15% (Slovenia) and 50% (Russia,
Macedonia) of the official one. Some say these figures are
a deliberate and ferocious understatement. These are mind
boggling amounts, which circulate between financial
centres and off shore havens in the world: Cyprus, the
Cayman Islands, Liechtenstein (Vaduz), Panama and
dozens of aspiring laundrettes.
The money thus smuggled is kept in low-yielding cash
deposits. To escape the cruel fate of inflationary
corrosion, it has to be reinvested. It is stealthily re-
introduced to the very economy that it so sought to evade,
in the form of investment capital or other financial assets
(loans and credits). Its anxious owners are preoccupied
with legitimising their stillborn cash through the conduit
of tax-fearing enterprises, or with lending it to same. The
emphasis is on the word: "legitimate". The money surges
in through mysterious and anonymous foreign
corporations, via off-shore banking centres, even through
respectable financial institutions (the Bank of New York
we mentioned?). It is easy to recognize a laundering
operation. Its hallmark is a pronounced lack of selectivity.
The money is invested in anything and everything, as long
as it appears legitimate. Diversification is not sought by
these nouveau tycoons and they have no core investment
strategy. They spread their illicit funds among dozens of
disparate economic activities and show not the slightest
interest in the putative yields on their investments, the
maturity of their assets, the quality of their newly acquired
businesses, their history, or real value. Never the
sedulous, they pay exorbitantly for all manner of
prestidigital endeavours. The future prospects and other
normal investment criteria are beyond them. All they are
after is a mirage of lapidarity.
The Investors
This is the most intriguing group. Normative, law abiding,
businessmen, who stumbled across methods to secure
excessive yields on their capital and are looking to borrow
their way into increasing it. By cleverly participating in
bond tenders, by devising ingenious option strategies, or
by arbitraging - yields of up to 300% can be collected in
the immature markets of transition without the normally
associated risks. This sub-species can be found mainly in
Russia and in the Balkans.
Its members often buy sovereign bonds and notes at
discounts of up to 80% of their face value. Russian
obligations could be had for less in August 1998 and
Macedonian ones during the Kosovo crisis. In cahoots
with the issuing country's central bank, they then convert
the obligations to local currency at par (for 100% of their
face value). The difference makes, needless to add, for an
immediate and hefty profit, yet it is in (often worthless
and vicissitudinal) local currency. The latter is then
hurriedly disposed of (at a discount) and sold to
multinationals with operations in the country of issue,
which are in need of local tender. This fast becomes an
almost addictive avocation.
Intoxicated by this pecuniary nectar, the fortunate, those
privy to the secret, try to raise more capital by hunting for
financial instruments they can convert to cash in Western
banks. A bank guarantee, a promissory note, a confirmed
letter of credit, a note or a bond guaranteed by the Central
Bank - all will do as deposited collateral against which a
credit line is established and cash is drawn. The cash is
then invested in a new cycle of inebriation to yield
fantastic profits.
It is easy to identify these "investors". They eagerly seek
financial instruments from almost any local bank, no
matter how suspect. They offer to pay for these coveted
documents (bank guarantees, bankers' acceptances, letters
of credit) either in cash or by lending to the bank's clients
and this within a month or more from the date of their
issuance. They agree to "cancel" the locally issued
financial instruments by offering a "counter-financial-
instrument" (safe keeping receipt, contra-guarantee,
counter promissory note, etc.). This "counter-instrument"
is issued by the very Prime World or European Bank in
which the locally issued financial instruments are
deposited as collateral.
The Investors invariably confidently claim that the
financial instrument issued by the local bank will never be
presented or used (which is true) and that this is a risk free
transaction (which is not entirely so). If they are forced to
lend to the bank's clients, they often ignore the quality of
the credit takers, the yields, the maturities and other
considerations which normally tend to interest lenders
very much.
Whether a financial instrument cancelled by another is
still valid, presentable and should be honoured by its
issuer is still debated. In some cases it is clearly so. If
something goes horribly (and rarely, admittedly) wrong
with these transactions - the local bank stands to suffer,
too.
It all boils down to a terrible hunger, the kind of thirst that
can be quelled only by the denominated liquidity of lucre.
In the post nuclear landscape of this part of the world, a
fantasy is shared by both predators and prey. Circling
each other in marble temples, they switch their roles in
dizzying progression. Tycoons and politicians,
industrialists and bureaucrats all vie for the attention of
Mammon. The shifting coalitions of well groomed man in
back stabbed suits, an hallucinatory carousel of avarice
and guile. But every circus folds and every Luna park is
destined to shut down. The dying music, the frozen
accounts of the deceived, the bankrupt banks, the Jurassic
Park of skeletal industrial beasts - a muted testimony to a
wild age of mutual assured destruction and self deceit.
The future of Eastern and South Europe. The present of
Russia, Albania and Yugoslavia.