We’re screwed! Where’s our money, Göran?

October 3, 2019
Kaupo Nõlvak
Investors’ representative in the bankruptcy committee

Last week’s article in Eesti Ekspress weekly about Swedbank’s new executives who will this week visit Estonia for the first time in their new capacity used an intriguing wordplay in its headline, roughly translated as “We’re screwed! Chairman of the supervisory board of troubled Swedbank visits Estonia to pressure Ratas” (link to the article in Estonian: https://ekspress.delfi.ee/persoon/taitsa-persson-mudas-swedbanki-noukogu-esimees-saabub-eestisse-ratast-masseerima?id=87525751)

For an average reader it may be simply nothing else but a witty wordplay where the surname of Göran Persson, Sweden’s ex-PM and the new supervisory board chairman of Swedbank embroiled in a money laundering scandal, is used to describe Swedbank’s current situation (from the translator – in Estonian, Persson sounds similar to an expletive that means screwed). For approximately 80 clients of Swedbank whose portfolio the bank invested in land acquisitions in Romania, this exactly describes their relation with Swedbank, i.e. they  feel screwed. As Swedbank Estonia’s management has for a decade been refusing to answer investors’ questions about the failed projects in Romania, we have no option but to turn to Sweden for an apology, explanation and compensation. So, where’s our money, Göran? After all, EUR 8.4 million does not vanish like that.
For the last four years, I have been a member of the bankruptcy committee, trying to save the Romanian investments of almost 200 Estonian private investors. It’s the process where Swedbank has for years been obfuscating its clients whose investment portfolios the bank managed. In the investment process where the bank was bound by the due diligence obligation, Swedbank used the funds of its clients to buy random field plots and almost inaccessible properties in Romania. In the litigation that has been going on for a few years, the bank’s firm position is that the bank has been diligent and that all claims are expired and that the public has been given the impression that the investors themselves were stupid and simply made wrong investment decisions. Today, however, we’re at a point where we need to solve also the “other half of the calculation”, because 42% of the money lost in Romania was the money of clients of Swedbank placed by the bank in providing portfolio management services for its clients, and without consulting them. By the same rhetoric that one hears in public, i.e. that this investment decision was stupid and ill-considered, it is clear that also Swedbank that made the decision for its clients must be held accountable.

In short, the story of Romania’s “land deal” is simple. In 2007, EUR 8.4 million was raised from Estonian investors by Swedbank and with its assistance which was then invested as purchase of 46.3 ha of low-value arable land in Romania divided into many smaller lots. We know now that, according to statistics published by real estate agency DTZ, the average price of arable land in Romania in 2007 was EUR 1,000 per hectare. This means that a fair price for this 46.3 hectares of low value arable land may have been no more than EUR 46,300. Yet Swedbank, using the funds of the clients of its portfolio management service, accepted the acquisition of these plots for a price that exceeded it by EUR 8.3 million. Moreover, the bank earned EUR 200,000 in commission, which is more than the real value of all the land purchased. In addition, the bank accepted as management fees for the “investment program” sums that several times exceeded the real value of the purchased plots. It is notable that in order to pay these management fees, a loon was taken out at a time when Swedbank had already acquired 100% of the debtor. In spite of being the owner, the bank did not consider placing its own funds in its wholly-owned subsidiary for paying possible management fees, to say nothing of lending money for this purpose. An absurd but accurate description of what happened.

According to Eurostat, in a decade, i.e. by 2017 the average price per hectare of arable land in Romania had increased to EUR 2,085. In other words, if the 2007 transactions had been made at the right price, as the bank claims until now, the investment would have at least doubled by today, i.e. the value of the land portfolio would have increased from EUR 8.4 million to EUR 16.8 million. But the reality is different.

In the course of the bankruptcy process, we have for the last three years been trying to sell properties that have been described to Estonian investors as promising areas for development. Unfortunately, without much success. Throughout the process, we have asked Swedbank’s representatives on the basis of which appraisal reports or real estate market analysis they acquired the worthless properties. In response, Swedbank, while claiming that it has acted diligently, says these documents have not been preserved. Register data shows that just before the placing of its clients’ funds in the plots by Swedbank, the same field plots were purchased for up to 30 times cheaper. 

Victor Guzun, former Ambassador of Moldavia in Estonia whom we have used as an expert for his knowledge of the local language and market in Romania, believes that someone is guilty of fraud. After all, intelligent and honest people could not have paid several million euros more for such worthless properties. Neither he nor the bankruptcy committee can understand what motivated Swedbank’s employees who were bound by the due diligence obligation to make such a nightmarish mistake. But perhaps it was not a mistake, but something much worse. A big and well-known bank invested its clients’ funds literally in worthless dirt. I don’t know how to comment the bank’s explanation that the price of the properties at the time of purchase represented their market value, but then unexpected risk materialized in the form of recession and prices collapsed. According to statistics for the market of agricultural land prices in Romania, this explanation is simply not true.

Peeter Sepper, the bankruptcy trustee who was appointed by the court for the Swedbank’s bankrupt investment, has been trying to sell plots solicited to Estonians through leading Romanian real estate companies for 3 years. Only in recent months two lots totalling 11.4 hectares, i.e. 24.6% of the total land portfolio, have been sold for a total of EUR 200,000. Unfortunately, there has been no interest in other properties.

Another fact is that Kaie Trump, head of Swedbank’s portfolio management company, stepped down in 2015, apparently after becoming bored of misinforming the investors and of constant postponing of bankruptcy. She has stated, among others, that she acted under the guidance of a Swedbank representative. This guidance, however, served the purpose of delaying the surfacing of the problem.

What is important is the fact that at the time when Swedbank was obliged to protect the interests of its clients by making for them wise and well-considered investment decisions, the bank itself charged a commission on every investment of the bank’s client made in Romania. Thus, on the one hand, it was in the bank’s interest to invest its clients’ funds in precisely those worthless land plots, earning the bank quick income, and, on the other hand, the bank was obliged to invest client funds carefully and professionally, solely in the interest of its clients. I think there is a clear conflict of interest here.

The bank that was respected and trusted by the clients has for years tried to keep the truth under wraps. It seems that it has been deliberate, since now we have a situation where a large share of clients who are victims of this fraud have taken the case to court and the bank has the position that the claims have become obsolete. Considering the millions that were “lost” and the deliberate delaying tactic by the bank, it is not surprising that investors and I, a bystander, find it hard to believe that the bank’s behavior was not intentional.

A court case against one’s own clients whose interests the bank should have represented cannot be considered a respectful thing to do. In the court the bank claims that it has been diligent enough, that the land was valuable and that today’s situation is normal investors’ risk. But is this normal investment risk? Could such a situation have arisen if the bank had complied with its due diligence obligation in properly investing its clients’ funds? If the bank had even slightly studied which properties it was actually buying, it could not have made the decision to invest its clients’ funds.

I am pleased to see that Swedbank has already publicly acknowledged its shortcomings in the prevention of money laundering and modestly admits that such mistakes may to a lesser degree occur in the system even today (link to an article in Estonian: https://raha.geenius.ee/rubriik/uudis/swedbank-tunnistab-rahapesuvastases-toos-on-meil-endiselt-puudujaake/). Great. But, dear Swedbank, you have been negligent not only in money laundering issues, but also in investing the funds of these 80 investors. Wouldn’t it be a good time today to admit that you failed to exercise due diligence and failed to appraise real estate? Why not remedy the mistakes that you made so that you can continue your business properly, and meet your requirements?  I am aware that the disappointed investors in this case have repeatedly invited you to sit behind the negotiating table to find a solution to the problem and to find out what happened. Instead, you frustrate your own clients in court and refuse to explain or seek any solution. Mr. Göran Persson, if you found it possible to internationally admit mistakes in complying with money laundering rules, wouldn’t you also find it polite to admit mistakes made when handling the money of Estonian investors?