TALLINN, 12 June 2014 - The National Audit Office found in its audit that the resolution to form the National VEF Fund made by the Riigikogu in 1993 was not executed as required, because there were significant deficiencies in the activities of the Bank of Estonia and the VEB Fund it was given to manage in regard to the formation of the Fund, maintenance of the claims register and the organisation of the management of the Fund. The Fund failed to perform the main task assigned to it by the Riigikogu, which was to find solutions to getting back frozen funds, although some work was done for this purpose at the level of state. Based on the preserved documents, it is impossible to ascertain who selected the depositors whose claims were transferred to the VEB Fund and whose claims the state of Estonia decided not to compensate, and what the principles behind this selection were.

The National Audit Office agrees with the opinion of the internal audit of the Bank of Estonia that the official letter with false data sent by the Bank of Estonia, which made it possible for the Russian company TSL International to obtain 32.3 million US dollars of the money frozen in the correspondent accounts of Estonian banks from the Bank for Foreign Trade of the USSR with the co-assistance of the state, had been written in the course of planned activities or intentionally. The person who wrote the letter with the false data in the Bank of Estonia was not ascertained in the course of the audit of the National Audit Office. The persons involved in this who were interviewed during the audit claimed to not remember this.

Background

Since the events related to the VEB Fund started more than 20 years, the National Audit Office proceeded from the principle that the event should be analysed in the context of the state’s development as it was at the time. It is also necessary to consider the situation in Estonian banking immediately before and after the country regained its independence as well as the conditions in which the heads of state and banks made their decisions.

On 13 January 1992 the Presidium of the Supreme Soviet of the Russian Federation adopted a resolution about the Bank for Foreign Trade of the USSR (Внешэкономбанк, Vnesheconombank, hereinafter VEB Bank), which concerned the continuity and streamlining of the banking system, serving the foreign debt of the former Soviet Union etc. The use of the foreign currency of companies, organisations, institutions and banks held in the VEB Bank as of 31 December 1991 was suspended/frozen with the resolution. The conditions of the foreign currency that was to be received from 1992 for transactions performed in 1991 were also specified.
As two Estonian commercial banks – the Foreign Operations Administration of the Bank of Estonia (Eesti Panga Välisoperatsioonide Valitsus, hereinafter VOV; the state-owned North-Estonian Equity Bank commercial bank (Põhja-Eesti Aktsiapank, hereinafter PEAP) was established on the basis of this in spring 1992) and the Union Baltic Bank (Balti Ühispank, hereinafter UBB) – had correspondent accounts in the VEB Bank, the decision made by Russia also had a strong impact on Estonian banking.
Continuing with ordinary economic activities and executing the payment orders of depositors in a situation where the majority of the banks’ funds were stuck in Russia meant that the two banks that were heavily involved in foreign trade ended up in payment difficulties. In autumn 1992 the Supervisory Board of the Bank of Estonia established a moratorium on PEAP and UBB due to liquidity problems. The insolvency of the banks threatened to make the entire Estonian banking sector collapse and reduce the reliability of the Estonian kroon, which had only been in circulation for six months.
On 20 January 1993 the Riigikogu adopted the resolution ‘Accounts of Estonian Banks Frozen in the Bank for Foreign Trade of the USSR’ with which the National VEB Fund was established. The frozen foreign currency of the two Estonian banks in the amount of 890.5 million kroons had to be placed in the VEB Fund as a claim against VEB Bank. This amount included 533.5 million kroons of depositors’ money and 357 million kroons of the banks’ ‘own’ funds.
According to the resolution, the VEB Fund had to issue certificates to legal entities and natural persons to confirm that their owners were entitled to the money frozen in Russia once it has been returned. The state of Estonia did not assume the obligation to pay out the frozen funds. The objective of the establishment of the VEB Fund was to restore the solvency of the two banks in order to prevent damaging the reliability of the banking sector and the kroon. The Bank of Estonia was appointed the manager of the VEB Fund. The main duty of the VEB Fund was to find solutions to the satisfaction of the claims in the VEB Fund.

Important conclusions drawn by the National Audit Office:

The information about the total amount of the money frozen in the VEB Bank presented to the Riigikogu was correct (as at 17 November 1992), but the circumstances of dividing the amount between the money of the banks’ depositors and that of the banks themselves are unclear. It is not known what the division given in the explanatory memorandum to the resolution of the Riigikogu (i.e. that 533.5 million kroons belonging to the banks’ depositors and 357 million kroons of the banks’ own money was frozen in the VEB Bank) is based on.  Most of the documents in the archive do not support this division. Since the VEB Bank froze the accounts of two Estonian banks and not the current accounts of their depositors (the clients of Estonian banks were not clients of the VEB Bank), then dividing the frozen 890.5 million kroons in funds of the banks’ depositors and the banks’ own money was arbitrary and not in compliance with the nature of correspondent banking (neither today nor at the time).

The resolution of the Riigikogu was not properly executed by the Bank of Estonia or the VEB Fund. Based on the preserved documents, it is impossible to ascertain who selected the persons whose claims were transferred to the VEB Fund and when the register of the VEB Fund’s certificates was actually created. The resolution of the Riigikogu stated that the Bank of Estonia, which had been appointed the manager of the VEB Fund, has to identify the depositors of the two banks whose money was associated with the accounts frozen in the VEB Bank. Based on the preserved documents, it is impossible to ascertain who actually selected the claims of depositors transferred to the VEB Fund which the state of Estonia decided not to compensate, and what the principles behind this selection were. The first known official register was prepared as at 31 May 1995, i.e. several years after the relevant resolution of the Riigikogu was adopted. The analysis carried out by the National Audit Office demonstrated that the amount of the claims of depositors entered in the register of the VEB Fund’s certificates was 26 million kroons higher than set forth by the Riigikogu in its resolution.
Although the resolution of the Riigikogu stated that the VEB Fund was obliged to call a general meeting of certificate holders within six months of the date of the resolution (i.e. no later than in July 1993) so that the holders of the claims could elect a management board for the VEB Fund, it took the Fund seven years to comply with the resolution of the Riigikogu. The VEB Fund called the general meeting of the holders of the claims as late as in 2000, after Tallinn City Court had satisfied the relevant claim of the VEB Fund’s creditors in 1997 and in 1999 imposed a fine on the Bank of Estonia and the VEB Fund, which had been reorganised into a foundation, for their failure to comply with the court ruling.

The accounting records of the VEB Fund were not kept correctly. The balance sheet of the VEB Fund was made to mathematically correspond to the annual balance notice of the VEB Bank. As ca 40% of the claims were transferred to the VEB Fund in Estonian kroons even though no Estonian kroons were frozen in the VEB Bank, the amount of the VEB Fund’s claims and the balance of the money frozen in the VEB Bank were not the same due to changes in exchange rates.

Unclear transactions were performed with the certificates of the VEB Fund. The National Audit Office found that the volume of the register was reduced by 9.8 million and increased by 9.4 million Estonian kroons under unknown circumstances. 94% of these transactions were performed by the registrar North Estonian Bank (Põhja-Eesti Pank, hereinafter PEP), which belonged to the Bank of Estonia and the state. For example, PEP sold certificates that did not actually exist for more than one million US dollars to a company related to TSL International. This indicates that the manager of the VEB Fund appointed by the Riigikogu did not supervise the maintenance of the VEB register adequately.

With the assistance of the state of Estonia, TSL International managed to get US$32.3 million of the money frozen in the correspondent accounts of Estonian banks. The preconditions for getting the compensation were created by the official letter with false data sent from the Bank of Estonia in April 1995. The identity of the person who wrote the letter with the false data was not ascertained during the audit. The initial letter, which is kept in the archive, contained correct data, but the letter was later amended. The National Audit Office agrees with the opinion of the internal audit of the Bank of Estonia that the preparation of the letter with false data was pre-meditated. The National Audit Office finds that the person(s) who wrote the letter (or who organised the preparation of the letter) had to be certain in April 1995 that TSL International would later manage to acquire the certificates of the Republic of Estonia and the Bank of Estonia. The National Audit Office does not know whether the person(s) on the Estonian side who helped TSL International get the money benefitted from this.
The National Audit Office has no evidence that the state sustained any financial damage as a result of the letter with the false data. However, the Bank of Estonia took a significant financial risk for the state by sending the letter. The letter gave TSL International the right to demand ca half of the money frozen in VEB Bank. If Russia had decided to release the money and TSL International had not bought the certificates, the letter would have given Russia the right to not compensate ca half of the frozen money to Estonia.
The National Audit Office finds that the reason why TSL International bought the certificates after the aforementioned letter was sent by the Bank of Estonia could have been the fact that the person or persons who participated in the preparation of the letter with false data and planned the entire scheme of TSL International had to prevent a situation where the balance of the amount frozen in VEB Bank would decrease by half (US$32.3 million) without the volume of the VEB Fund decreasing at the same time. If Russia had decided to release the money in the VEB Bank at some point, there would not have been enough of it for all certificate holders and the Bank of Estonia or the VEB Fund would have had no explanation as to what had happened.
The audit also revealed that ca 80% of the 890.5 million kroons frozen in the VEB Bank accumulated in the accounts of Estonia banks after the money was frozen in 1992. As at 1 January 1992, when VEB froze the money, the amount of the currencies held in the accounts of the two banks in the VEB totalled 176.5 million Estonian kroons (based on the exchange rate of the monetary reform of 20 June 1992, as the Estonian kroon did not yet exist on 1 January 1992). In other words, when the VEB Bank blocked the money held in the accounts of Estonian banks, UBB and PEAP had five times less money in the VEB Bank than was ultimately held there.
It also became evident that freezing the accounts did not mean that receipts and payouts were stopped in full. At least US$59.9 million was received in and US$14.3 million was paid out of the accounts of the two Estonian banks in the VEB Bank during 1992 (receipts and payouts are given in US dollars here, as they comprised the majority of the currency deposits of the banks). The National Audit Office does not know the conditions on which the VEB Bank allowed for payouts to be made from the blocked accounts.

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Answers to key questions

Did the VEB Bank freeze the foreign currency deposits of two Estonian commercial banks in the amount of 890.5 million kroons on 1 January 1992?
No. As at 1 January 1992, when VEB froze the money of the Union Baltic Bank (Balti Ühispank, hereinafter UBB) and the Foreign Operations Administration of the Bank of Estonia (Eesti Panga Välisoperatsioonide Valitsus, hereinafter VOV), the amount of the currencies held in the accounts of the two banks in the VEB Bank totalled 176.5 million Estonian kroons (based on the exchange rate of the monetary reform of 20 June 1992, as the Estonian kroon did not yet exist on 1 January 1992). The majority or ca 80% of the money frozen in the VEB accumulated in the accounts of the Estonian banks after the accounts were frozen in 1992. 890.5 million kroons (more specifically 890.6 million kroons, but the amount 890.5 million kroons given in the explanatory memorandum to the resolution of the Riigikogu of 20 January 1993 is used in the report for the sake of consistency) belonging to UBB and the North-Estonian Equity Bank (Põhja-Eesti Aktsiapank, hereinafter PEAP) was frozen in the VEB Bank as at 17 November 1992. 845 million kroons belonging to Estonian banks in the VEB was frozen as of the date of the Riigikogu’s resolution. (The total frozen amount decreased because the amount of US$3,634,000 received in the account of PEAP was transferred back on the demand of the VEB Bank on 27 November 1992.)

Were transfers made from the accounts of Estonian banks after they were frozen in the VEB Bank?

Yes. At least 59.9 million US dollars (hereinafter US$) was received in and US$14.3 million was paid out of the accounts of the two Estonian banks in the VEB Bank during 1992 (receipts and payouts are given in US$ here, as they comprised the majority of the currency deposits of the banks). The National Audit Office does not know the conditions on which the VEB Bank allowed for payouts to be made from the blocked accounts. The VEB Bank generally did not restrict receipts in the accounts of UBB and VOV (PEAP) in the VEB Bank.

Did the VEB Bank freeze the current accounts of the depositors of UBB and VOV (PEAP)?

No, the VEB Bank did not freeze the current accounts of the depositors of UBB and VOV (PEAP). The VEB Bank froze two correspondent accounts of UBB and two correspondent accounts of VOV (PEAP). The depositors of UBB and VOV (PEAP) had current accounts in UBB and VOV bank, not in the VEB Bank.

Was the creation of the VEB Fund the only option considered as a solution to the problem of the frozen money in the VEB Bank?

No. The plan to establish the VEB Fund was one of six solutions considered by the Bank of Estonia. It was decided to present the idea of the VEB Fund, which was also supported by the Government of the Republic, to the Riigikogu. The creation of the VEB Fund was the only action plan discussed by the Riigikogu and no alternatives were presented or considered.

Were the depositors of the Estonian banks treated equally upon the establishment of the VEB Fund?

No, they were not. Many clients of the banks whose transfers were made in the accounts of UBB and VOV (PEAP) via the VEB Bank could take or transfer their money out from UBB or VOV (PEAP) after the accounts were frozen in 1992. The remaining clients whose money moved via the VEB Bank lost their money, as their claims were transferred to the VEB Fund.

Was releasing the frozen money the real purpose for which the VEB Fund was established?

No. The primary objective of the establishment of the VEB Fund was to restore the solvency of UBB and PEAP in order to prevent damaging the reliability of the banking sector and the kroon. This is why the frozen 890.5 million kroons was divided in two in the explanatory memorandum to the resolution of the Riigikogu: 533.5 million belonging to the depositors of the banks and 357 of the banks’ own money. The state compensated the frozen amounts to UBB and PEAP in money and government bonds. It did not compensate the frozen money to depositors; it was transferred to the VEB Fund and the depositors were deprived of the possibility to demand their money from UBB or PEAP. The main goal, which was to restore the liquidity of the banks and thereby to stabilise the Estonian banking system, was achieved this way. The decision to establish the VEB Fund was made due to the fact that the state, which had recently restored its independence, had very little money and the VEB Fund scheme was the cheapest way of saving the banks among all of the options considered.

Was the division of the money in the explanatory memorandum of the Riigikogu, i.e. that 533.5 million kroons of the frozen money belonged to the banks’ depositors and 357 million kroons was the banks’ own money, correct?

It is unclear what the division given in the explanatory memorandum to the resolution of the Riigikogu (i.e. that 533.5 million kroons of the money frozen in the VEB Bank belonged to the depositors and 357 million to UBB and PEAP) was based on. Although the Riigikogu’s resolution stated that the first thing to be ascertained was the size of the deposits of UBB and PEAP clients blocked by the VEB Bank and then how much of the frozen money belonged to the banks themselves, the division was actually given in the explanatory memorandum to the resolution. There are documents among the preserved materials that contain different opinions on how much money UBB and PEAP had paid out to the depositors who had performed their settlements via the VEB Bank after the accounts were frozen. Only a few sources contain the same information as given in the explanatory memorandum to the resolution of the Riigikogu. According to most of the documents, the banks paid more money to their depositors than the amount given in the explanatory memorandum.

Was 357 million kroons of the banks’ own money frozen in the VEB Bank?

No. No money belonging to the banks themselves was frozen in the VEB Bank. In the scheme of the VEB Fund, the money that UBB and VOV (PEAP) had paid out to their depositors, who had performed their settlements via the VEB Bank, on the account of the deposits of other clients and the loans taken by the banks themselves, was called the frozen money that belonged to the banks themselves.

Who selected the claims transferred to the VEB Fund and on what basis?

Based on the preserved documents, it is impossible to ascertain who selected the persons whose claims were transferred to the VEB Fund. The persons involved in this who were interviewed during the audit claimed not to remember this. Although the resolution of the Riigikogu required the Bank of Estonia, which had been appointed the manager of the VEB Fund, to ascertain the depositors of UBB and VOV (PEAP) whose money was associated with the accounts frozen in the VEB Bank, there is no evidence that the Bank of Estonia actually defined the data and criteria based on which the depositors of UBB and PEAP whose money was transferred to the VEB Fund as claims were selected.

When was the official VEB register created and who kept the register?

Based on the preserved documents, it is impossible to ascertain who created the register of the VEB Fund, when this was done or what principles it was based on. The persons involved in this who were interviewed during the audit claimed not to remember this. The Bank of Estonia as the official manager of the VEB Fund had to guarantee that a correct register was created in order to keep record of the VEB Fund certificates issued to the holders of the claims. The first known official register was prepared as at 31 May 1995. It was issued by the Bank of Estonia in relation to the action filed by the VEB Fund certificate holders and the court procedure.

Were as many claims of the banks’ depositors entered in the VEB register as indicated in the explanatory memorandum to the resolution of the Riigikogu?

No. The analysis carried out by the National Audit Office demonstrated that the amount of the claims of UBB and PEAP depositors entered in the VEB register was 26 million kroons higher than set forth by the Riigikogu in its resolution.

Were the accounting records of the VEB Fund kept correctly?

No, the accounting records of the VEB Fund were not kept correctly. The balance sheet of the VEB Fund was made to mathematically correspond to the balance notice of the VEB Bank. As ca 40% of the claims were transferred to the VEB Fund in Estonian kroons even though no Estonian kroons were frozen in the VEB Bank, the amount of the VEB Fund’s claims and the balance of the money frozen in the VEB Bank were not the same due to changes in exchange rates. This difference was not indicated in accounting as a profit or less, and the entry ‘Frozen in client accounts’ was mathematically increased or decreased by the amount of the difference.

Were unclear transactions performed with the certificates of the VEB Fund?

Yes. There are transactions where it is not known why the claims were transferred to or removed from the VEB register. The National Audit Office found that the volume of the register was reduced by 9.8 million and increased by 9.4 million kroons under unknown circumstances. 94% of these transactions were performed by the registrar North Estonian Bank. For example, PEP sold certificates that did not actually exist for more than one million USD to a company related to TSL International. This indicates that the manager of the VEB Fund appointed by the Riigikogu did not supervise the maintenance of the VEB register adequately.

Did the VEB Fund achieve the main goal assigned to it by the Riigikogu, i.e. to find solutions to satisfy people’s claims in regard to the accounts frozen in the VEB Bank?

No. Although the delegations of the Republic of Estonia and the Russian Federation met for negotiations many times, the frozen money was not released. The majority of people whose money held in UBB and VOV (PEAP) was transferred to the VEB Fund were left without compensation. In addition to TSL International, which received bonds of the Russian Federation (and money) from the VEB Bank to the extent of ca half the VEB Fund’s volume, five other legal entities managed to transfer money in amounts of some significance out of the VEB Bank. The VEB Fund was reorganised as a foundation in March 1999. The VEB Foundation was liquidated in May 2014.

Was US$32.3 million of ISL International’s money blocked in the VEB Bank?

No. US$914,817, which was transferred to TSL International in error, was frozen in the VEB Bank. US$3.5 million was received in the account of TSL in UBB in April 1992 as a result of an error made by the VEB Bank. The company did not return the money, but transferred 2.5 million of it to another company. There was less than 1 million US$ in the account of TSL International by November 1992 when a moratorium was established on UBB and PEAP. This amount was transferred to the VEB Fund as a claim, and in August 1994 TSL International waived the claim to the company United Russian Finance, which had the same owner. In April 1995, the Bank of Estonia sent confirmation to the VEB Bank that US$32.3 million of TSL International’s money had been frozen, but the company did not actually have any VEB Fund certificates.

Did TISL International get US$32.3 million back from the VEB Bank?

Yes. There are materials which confirm that TSL International did get compensation from the VEB Bank for the entire amount, i.e. US$32.3 million. Evidence suggests that TSL International received bonds of the Russian Federation for the amount of US$11.8 million from the VEB Bank. The remaining amount of US$20.5 million was transferred from the VEB Bank to the Vneshtorgbank of St Petersburg at the request of TSL International, where it could have been withdrawn in cash or bonds.

Did the state of Estonia help TSL International get the money?

Yes. TSL International would not have received the bonds of the Russian Federation (or money) from the VEB Bank without the letter of the Bank of Estonia that contained false data and the payment order made by PEP which gave the VEB Bank the order/consent for making the transfer to TSL International. The letter of the Bank of Estonia created the preconditions for TSL International to receive the US€32.3 million at some point. If the Bank of Estonia had submitted correct data to the VEB Bank in April 1995 or, in other words, had it not added TSL International to the list of companies whose money was frozen in Russia, the basis for the subsequent events would not have emerged. However, the letter of the Bank of Estonia and the payment order made by PEP alone were not enough to get the money. The consent of the Russian Ministry of Finance was also required.

Who wrote the letter with the false data sent to the VEB Bank from the Bank of Estonia on 5 May 1995?

The person who prepared the letter that made it possible for TSL International to get US$32.3 million from the VEB Bank was not identified during the audit. The initial letter, which is kept in the archives, contained correct data, but the letter was later amended. This indicated that the preparation of the letter with false data was premeditated and that the person(s) who wrote the letter (or who organised the preparation of the letter) had to be certain in April 1995 that TSL International would later manage to acquire the certificates of the Republic of Estonia and the Bank of Estonia. TSL International acquired the VEB Fund certificates that belonged to the Bank of Estonia and the government via the Estonian Union Bank (Eesti Ühispank) in 1997 and 1998. The National Audit Office does not know whether the person(s) on the Estonian side who helped TSL International get the money benefitted from this.

Did the state of Estonia sustain any financial damage due to the fact that the letter with false data was written and sent to the VEB Bank?

The National Audit Office has no evidence that the state sustained any financial damage as a result of the letter with the false data. However, the Bank of Estonia took a significant financial risk for the state by sending the letter. The letter gave TSL International the right to demand ca half of the money frozen in VEB Bank. If Russia had decided to release the money and TSL International had not bought the certificates, the letter would have given Russia the right to not compensate ca half of the frozen money to Estonia.

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The National Audit Office assessed whether the resolution of the Riigikogu of 20 January 1993 ‘Accounts of Estonian Banks Frozen in the Bank for Foreign Trade of the USSR’ was executed appropriately and whether the resolution was based on correct information. The National Audit Office also ascertained whether all of the known significant circumstances that concern the letter with false data prepared in the Bank of Estonia in 1995, which helped the Russian company TSL International obtain US$32.3 million worth of bonds of the Russian Federation (and money) from the VEB Bank, have been presented to the public.
The National Audit Office relied on the materials preserved in the archive of the Bank of Estonia and SEB Bank and in state authorities when giving its opinions. A representative of the National Audit Office took part in interviews with the persons concerned organised by the VEB Fund investigation committee of the Riigikogu.

The text of the audit report of the National Audit Office is available online at www.riigikontroll.ee.

Toomas Mattson
Head of Communication Service, National Audit Office
+372 640 0777
+372 51 34 900
[email protected]
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www.riigikontroll.ee
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• Posted: 6/12/2014 9:00 AM
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