Stray Bond Payment After Russian Default Has Sberbank Seeing Red

(Bloomberg) -- Regulators might expect that shutting down a bank under suspicion for asset-stripping and fraud is enough to staunch the bleeding.

But five months after Tatfondbank PJSC, one of Russia’s biggest regional banks, defaulted on a bond as the regulator seized control, State Street Corp. authorized payment of more than $500,000 in interest and principal to a Kazakh investor that held the debt, the U.S. custodian bank said.

While the payment was reversed within two weeks, it shows a cross-border transaction can slip past internal controls despite the financial industry’s focus on compliance and the vetting of suspicious activity after money laundering scandals that cost billions. Tatfondbank’s management has been under investigation in Russia since at least March for large-scale fraud, and its chief executive officer is being held in pre-trial detention.

State Street got its money back but caught in the middle is Sberbank PJSC. The Russian state bank’s Kazakh office transferred the payment to the bondholder’s broker from the Boston-based custodian bank, according to two people with knowledge of the matter. It may be left with the loss because the investor hasn’t returned the money, the people said, asking not to be identified because they weren’t authorized to speak to the press.

“When a bank goes into temporary administration it can be hard to gauge how its assets are unwound,” said Fitch Ratings analyst Alexander Danilov. “But obviously all recovered amounts should go to repaying the bank’s liabilities according to the priority of claims and not just to a specific bondholder.”

Internal Investigation

The payment on the defaulted note has led Sberbank to open an internal investigation into the incident, according to one of the people familiar with the issue. The bondholder’s broker, BCC Invest, said it’s also looking into the circumstances surrounding the payment. It declined to identify the bondholder.

In December, Russia’s central bank barred Tatfondbank from making payments -- including a disbursement on the $70 million bond in question -- when it put the lender under temporary administration after months of unsuccessful talks with shareholders to stave off its collapse.

State Street was aware of the moratorium on Tatfondbank payments, according to a letter dated Jan. 20 that was seen by Bloomberg, in which Sberbank tells BCC Invest it was informed of the measure by the U.S. bank. The bond was in default by then, according to data compiled by Bloomberg.

Payment Trigger

But on April 28, when the bond would have matured, Euroclear Bank SA, the world’s biggest debt settlement system, sent a notification triggering payment, according to State Street. BCC Invest said the money arrived four days later. It wasn’t until May 9 that Euroclear sent a formal default notice for Tatfondbank, the custodian bank’s press service said by email. That’s when the payment was reversed.

“We do not halt or reverse payments on bonds until a security officially goes into default,” State Street said.

Euroclear declined to comment on the situation. Sberbank’s press office in Moscow declined to comment, citing client confidentiality. The Bank of Russia and the Deposit Insurance Agency, which oversees payouts to retail depositors, also declined to comment.

Tatfondbank, once the second-largest bank in Russia’s oil-rich Tatarstan region, lost its license in March as the regulator found a 118 billion-ruble ($2 billion) hole in its balance sheet. The local branch of Russia’s Investigative Committee accused the lender’s top management of committing fraud and shifting assets soon before the central bank took over. The jailed CEO pleaded not guilty in a hearing after his arrest.

--With assistance from Ksenia Galouchko

To contact the reporters on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net, Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net, Olga Voitova in Moscow at ovoitova@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Torrey Clark at tclark8@bloomberg.net, Paul Abelsky