VZCZCXRO1680
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSF #1652/01 3451244
ZNY CCCCC ZZH
O 111244Z DEC 06
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2934
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE

C O N F I D E N T I A L SECTION 01 OF 05 SOFIA 001652

SIPDIS

SIPDIS

DEPT FOR EUR/NCE NORDBERG

E.O. 12958: DECL: 12/07/2016
TAGS: ECON EFIN PGOV BU
SUBJECT: BULGARIAN BANKS GENERALLY HEALTHY, BUT A FEW BAD
APPLES REMAIN

REF: A) SOFIA INCSR REPORT (E-MAIL
     RADIVILOVA-GWILLIAMS ON NOV 3)

Classified By: Amb. John Beyrle for reasons 1.4 (b) and (d)

¶1.  (SBU) SUMMARY:  The Bulgarian banking sector is in its
strongest position since the banking crisis of 1996.  Thanks
to stricter legislation, sound bank oversight and management,
and an influx of large, stable foreign banks, most Bulgarian
banks are prospering legitimately.  Two skunks are circling
the picnic, however.  One is the high current-account deficit
(septel to follow), and the other is money laundering.  Among
the 32 registered banks, there are around seven to eight
banks whose practices are repeatedly cited as questionable or
shady ) funneling money for known criminals in money
laundering schemes and involved in connected lending.  The
Central Bank and government authorities are aware of these
banks, and claim to be trying to clean them up.  Some good
neews in all of this is the growing investigative capability
of the Financial Intelligence Agency (FIA); we need to
continue visible support for its efforts, and those of its
sister agencies (see para. 10).  END SUMMARY

WHERE THE SECTOR NOW STANDS
---------------------------

¶2.  (U) Following the finanicial crisis of 1996, when many
banks went bankrupt, there remain fewer banks (32), but with
sounder management.  Bulgarian commercial banks' total assets
are $26.2 billion, or 80 percent of the country's GDP.  Bank
expansion is due to a developing private sector, growing
credit demand and competitive pressures.  Consolidation is
expected as competition increases, exemplified in 2005 by the
Italian UniCredit (Bulbank) acquisition of the Austrian HVB
(Biochim and Hebros Banks) thus creating the country's
largest financial group with almost 25 percent market share.

¶3.  (U) The commercial banking sector is now mostly
privatized.  The largest, safest and cleanest are the
foreign-owned banks ) primarily from Austria, Italy, and
Greece.  The new international owners introduced good banking
practices and improved the quality of banking services.  The
three largest banks in Bulgaria are DSK Bank, owned by OTP
Bank of Hungary; Bulbank, owned by Unicredito Italiano; and
the United Bulgarian Bank (UBB) owned by the National Bank of
Greece.  Citibank is the only U.S. bank, focusing on
corporate, rather than retail clients.

PROBLEM AREAS: MONEY LAUNDERING AND CONNECTED-LENDING
--------------------------------------------- -------

¶4.  (SBU) The major problems in the Bulgarian banking system
include money laundering by Bulgarian and foreign criminals
and connected lending.  A previous concern, non-transparent
ownership, has been largely addressed through legislation
limiting the numerous offshore companies registered as bank
shareholders and consolidating the banks' ownership
structure.  Connected lending continues to be a problem among
some banks as their owners funnel money to related - less
competitive - companies, with no intention of repaying.  This
leaves legitimate investors and account-holders holding the
bag when bad loans go uncollected.

¶5.  (U) Banking and financial authorities are aware of the
most notorious banks and claim to be working hard to draft
legislation and regulations to bring practices in line with
Western norms, and to step up enforcement activities.
Pursuant to the law, the Bulgarian National Bank's
Supervisory Board conducts regular inspections of commercial
banks' portfolios to keep track of the level of new lending
and provisions against bad loans.  However, a number of
domestic banks apparently manage to escape strict scrutiny.

¶6.  (C) The banks under observation are:

--First Investment Bank (FIB) was founded in 1993 by Tseko
Minev and Ivailo Mutafchiev with funds of questionable
origin.  They remain owners, along with two offshore
companies from the Cayman Islands and the Channel Islands.
The European Bank for Reconstruction and Development (EBRD),
an early supporter and investor, recently told us that their
participation in FIB is seen as bad spot on EBRD's record.
FIB is now considered to have one foot in the legitimate
retail world ) it is known as one of the most aggressive and
"polished" banks ) as well as one in the murkier criminal
realm.

In 2003, Minev and Mutafchiev bought the Skopje-based Balkan
Bank, a.k.a. "the Multigroup bank."  Reportedly, the
acquisition saved the Macedonian bank from liquidation and
further inspection by the Central Bank authorities.  FIB has
allegedly extended approximately USD 133 million to shady
energy consultant Hristo Kovachki's Atomremontstroy for its
energy projects, as well as to help Kovachki acquire a
majority stake in the Sofia Municipal Bank.  Minev is
reported to own most of Bansko ski resort.  (Septel on
questionable energy players and practices to follow.)

XXXXXXXXXXXX told us recently that in the past two
years the FIA has conducted three or four on-site inspections
of FIB that resulted in violations.  XXXXXXXXXXXX stated that the
bank reported suspicious transactions requiring closer
examinations.  However, when the FIA began conducting the
investigations, FIB refused to provide additional information
on the account and account holders.  Therefore, FIA had no
choice but to fine the bank as a result of noncompliance with
banking compliance and secrecy laws.  XXXXXXXXXXXX stated that both
Bulgarian citizens and foreign managers ran FIB and that they
had suspicious offshore holdings and accounts. XXXXXXXXXXXX was a
little surprised that despite FIB's reputation, the EBRD was
still interested in joint projects with it.  He stated that
despite the presence of foreign managers and the appearance
of foreign investment, most of the money in the bank was
private Bulgarian-held capital.

--Corporate Commercial Bank.  This bank is also known as "The
Bank of Risk Engineering," the most important ) and
notorious - player in the energy field, participating in
almost all energy consultancy projects.  For its close ties
with Risk Engineering, owned by Bogomil Manchev, the bank is
expected to be strongly positioned in the financing of the
Belene project.  The state-owned National Electric Company,
which conducts non-transparent electricity sales through
middle-men such as Manchev and Kovachki, deposits its funds
there.  The main shareholder of the this bank is Bromak Ltd.,
owned by Tsvetan Vassilev, which in 2004 was involved in a
controversial privatization deal when it purchased the Sofia
state railway plant for far lower than market value.

--International Asset Bank (former First East International
Bank).  "The bank of SIC" - formerly one of the most
influential organized crime groups in Bulgaria.  Recent
reports describe Gazprom's interest in using IAB for its
future projects in Bulgaria.  The bank is owned by the
Margini brothers, who are being held in one of Bulgaria's
highest-profile cases against organized crime.  Former State
Security officers are suspected of involvement with the
Marginis, who are reportedly close to both the Socialists and
right-wing politicians close to former PM Ivan Kostov.

--Economic and Investment Bank (former Bulgarian-Russian
Investment Bank).  Offshore companies once owned this bank.
Tsvetelina Borislavova, common-law wife of Sofia mayor Boiko
Borissov, and Svetoslav Bozhilov own it now, together with
Icelandic investor Thor Bjorgolfsson through his company
Novator Finance Bulgaria.  The concern with this bank is that
it is practicing connected lending with lower quality
companies that wouldn't otherwise qualify.  There are also
concerns about the origin of some of the assets Borissov
allegedly passes through the bank.

--DZI Bank.  Under its previous name, RosEximbank, this was
"the Multigroup bank" of Emil Kyulev, who was killed in
October 2005 by still unknown gunmen.  The bank, the eleventh
largest in Bulgaria, was bought in September 2006 by Greek
Eurobank EFG.  A police official before 1989, Kyulev
allegedly entered the banking sector through the failed
RosEximbank, owned in part by Michael Chorny, a
Russian-Israeli businessman/organized crime figure who was
expelled from Bulgaria in 2000 on the grounds of threatening
national security.  Many observers have said that at the time
of his murder, Kyulev was trying to transform DZI into a
legitimate organization.

XXXXXXXXXXXX told us that in
the past DZI Bank was one of the biggest problems XXXXXXXXXXXX.  DZI Bank had a bad track record of non-reporting and
had several incidents of money-laundering activities.  In
August 2005, the bank was fined 20,000 BGN (USD 13,330) as a
result of violating money-laundering laws.  Since Emil Kyulev
was killed, however, the bank has shown marked improvements
in its reporting and compliance checks.  Although the bank
was again fined in August 2006 for failure to report
suspected money-laundering activities, in XXXXXXXXXXXX opinion, it
has demonstrated a clear change in "political will" in
reforming.  XXXXXXXXXXXX noted the exemplary reporting provided
by DZI regarding several transactions by the Director of the
State Hospital, a high ranking BSP official, who is a close
friend of the Minister of Health Gaidarski, in November 2006.
  XXXXXXXXXXXX said he was surprised that the Bank would report
this individual due to the political connections, but said he
was pleased with the result.  In discussing purported ties
between DZI and very-high ranking Government officials, XXXXXXXXXXXX
said XXXXXXXXXXXX was never instructed or pressured to stop XXXXXXXXXXXX
investigations of DZI - something XXXXXXXXXXXX cannot say was true for
all of the banks.  (Unfortunately, XXXXXXXXXXXX did not elaborate.)
XXXXXXXXXXXX admitted that he would be extremely naive to think that
DZI has completely reformed all of its ways, but stated that
DZI was one good example of how vigilance, analysis, and
compliance coupled with a desire to reform could bring a bank
into line in a short period of time.

--Investbank (former Neftinvestbank and International
Orthodox Bank ) "The Bank of Bishops and Generals").
Investbank is associated with Russian/Lithuanian/Monaco
businessman Denis Ershov and Bulgarian Mitko Sabev.  Ershov
was expelled from the country about the same time Michael
Chorny was, and the two are suspected of joint criminal
activity.  Sabev is now Chair of the Supervisory Board of
Petrol AD company, a major oil distributor company partially
owned by Russia's Lukoil.  Petya Slavova, previously married
to Sabev, who has strong interests in tourism, controls
Investbank.  Her company, Festa Holding, owns first-class
hotels in Sofia and on the Black Sea, and sells luxury wine
and other alcohol.  Slavova is believed to be the richest
woman in Bulgaria.  Although Slavova is currently seen to be
succeeding on her own merits, Ershov and Sabev allegedly were
the major sources of her financial stability and growth over
the years.

--Central Cooperative Bank, a.k.a., "The bank of TIM."  TIM
was started in Varna as a grain trading group, but has
interests in many sectors in Bulgaria ) including media,
retail and insurance - as well as being suspected of running
organized crime operations.  The group is close to taking
over the state-owned Bulgarian River Transport and the air
carrier "Bulgaria Air" through its ownership of the other
national carrier "Hemus Air".  Nikola Damyanov is Chairman of
the Supervisory Board.

--The Sofia Municipal bank.  The bank is now owned by the
Sofia municipality and the businessman Hristo Kovachki, who
wants to buy a majority share in the bank.  In addition to
his energy involvement, Kovachki is suspected of being part
of the circle of companies close to the leader of Movement
for Rights and Freedom (MRF) Ahmed Dogan.

(For further details on many of the above-mentioned
individuals, companies and alleged Organized Crime
syndicates, please review the "Bulgaria Organized Crime
Report" available at
http://www.state.sgov.gov/p/eur/sofia/index.cfm)

GOVERNMENT ACTION
-----------------

¶7.  (C) The Financial Intelligence Agency conducts random
spot checks and hands out fines - 12 in the January-October
2006 time period.  The FIA claims the Central Bank is not as
vigilant, while the Central bank questions FIA's legal and
structural capacity to fuly investigate banks.  In 2006, the
amendment to te Law on Credit Institutions eased the
investigaion and prosecution of financial crimes by giving
the Prosecutor General the right to request inforation
without a court order in cases involving mney laundering and
organized crime.  The banking ector is the only one to have
substantially complied with the law's requirement.
¶8.  (U) Banks and the 29 other reporting entities under the
Law on Measures against Money Laundering (LMML) are required
to apply "know your customer" (KYC) standards.  Since 2003,
all reporting entities are required to ask for the source of
funds in any transaction greater than 30,000 Bulgarian Leva
(BGL) (app. USD 19,000) or foreign exchange transactions
greater than 10,000 BGL (app. USD 6,500), and to notify the
Financial Intelligence Agency (FIA) of any cash payment
greater than 30,000 BGL (app. USD 19,000).

¶9.  (U) The 2006 LMML amendment expanded the definition of
money laundering and the list of reporting entities; allowed
FIA to obtain bank records without a court order; outlawed
anonymous bank accounts; expanded the definition of
"currency;" and required the disclosure of sources of
currency exported from the country.  Overall, experts view
this legislation as comprehensive and in line with
international standards. (See Ref A for more on money
laundering law and practices.)

COMMENT/RECOMMENDATIONS
-----------------------

¶10.  (C) The USG should increase cooperation with Bulgarian
banking authorities, including visits by high-level Treasury
officials to help the GoB better coordinate the activities of
its turf-fighting agencies.  The Central Bank, Financial
Intelligence Agency and Financial Supervisory Commission are
working together better than before, but need to continue
their cooperation and better involve the Ministry of Interior
and the Prosecutor's office.  In addition, Bulgaria must look
at the non-bank financial sector - particularly leasing - and
work against potential money laundering there.  As SEED
funding phases out for Bulgaria, we need to find other
sources for the relatively modest levels of money needed for
the training and equipment that can help the FIA and its
allies stay ahead of their well-funded adversaries.  END
COMMENT/RECOMMENDATION

BANK OWNERSHIP AND BOOK VALUE
-----------------------------

¶11.  (U) Note: The Book Value is estimated as Shareholder
Equity ) "assets minus liabilities."  Book value is more
accurate for banks here than market value as very few of the
domestic banks are currently traded on the stock exchange.
Data as of June 30, 2006, Rate BGN/USD 1.48

--DSK Bank: OTP Bank RT, Budapest with 100 percent; Book
Value: app. USD 403 million.

--Bulbank AD: UniCredito Italiano S. A. with 85.19 percent;
Book Value: app. USD 380 million.

--United Bulgarian Bank: National Bank of Greece with 99.9
percent; Book Value: app. USD 318 million.

--Postbank: EFG Eurobank Ergasias S. A. with 75.33 percent;
CEN Balkan Holdings Limited with 24.33 percent; Book Value:
app. USD 191 million.

--Commercial Bank Biochim was sold in July 2002 to Bank
Austria, Book Value: app. USD 150 million.

--Raiffeisenbank AD: Raiffeisen International Bank-Holding AG
with 100 percent; Book Value: app. USD 145 million.

--Societe Generale Expressbank: Societe Generale, Paris with
97.95 percent; Book Value: app. USD 115 million.

--Economic and Investment Bank: Valhamar Group Ltd, a holding
company from the group controlled by Thor Bjorgolfsson,
through the subsidiary "Novator Finance Bulgaria Sarl" seated
in Luxembourg with 34 percent; Tsvetelina Borislavova
Karagiozova with 25.48 percent directly, and together with
related parties Katex AD and Runo Kazanlak AD with 37.47
percent; Katex AD with 10.61 percent directly, and together
with related parties Runo Kazanlak AD and Tsvetelina
Borislavova Karagiozova with 37.47 percent; Svetoslav Bozhkov
Bozhilov with 25.77 percent; Book Value: app. USD 104 million.

--First Investment Bank: Ivailo Dimitrov Moutafchiev with
31.83 percent; Tseko Todorov Minev with 31.83 percent; First
Financial Brokerage House with 13.89 percent; FIB's web site
attributes the remaining stake to: Growth Management Limited
- 10.00 percent; Hillside Apex Fund Limited - 10.00 percent;
Legnano Enterprises - 2.45 percent Hillside Apex Fund Limited
and Growth Management Limited, two offshore companies, each
acquired a 10 per cent stake in the bank from the European
Bank for Reconstruction and Development, which has made a
full exit from FIB. Book Value: app. USD 96 million.

--Hebrosbank was sold in March 2000 to Regent Pacific Group;
Book Value: USD 76 million.

--Bulgarian-American Credit Bank: Bulgarian-American
Enterprise Fund with 69.38 percent; Book value: app. USD 63
million.

--Central Cooperative Bank: CCB Group Assets Management EAD
with 67.70 percent; Book Value: app. USD 55 million.

--Piraeus bank: Piraeus Bank, Athens, Greece with 99.79
percent; Bank Piraeus has recently acquired local Eurobank.
Book Value: app. USD 52 million.

--MKB Union Bank: MKB Bank, Hungary with 60 percent; Union
Group with 19.86 percent; Boras with 14.14 percent; Book
Value: app. USD 43 million.

--DZI Bank: Greek Eurobank EFG bank with 74.26 percent (Note:
data end-September).  Eurobank EFG bank also majority owner
of Bulgarian Post bank. Book Value: app. USD 39 million.

--Corporate Commercial Bank: Bromak with 89.21 percent
directly and jointly with Victoria Insurance Company
(indirectly) with 94.35 percent; Book value: app. USD 36
million.

--Allianz Bulgaria: Allianz Bulgaria Holding Ltd. with 79.72
percent; Allianz Bulgaria Holding Ltd is owned by the German
Insurance Group Allianz AG, Munich.  Book Value: app. USD
34.5 million.

--BNP-Paris Bank: Bank Nationale de Paris, France with 100
percent; Former Energy Minister Milko Kovachev is a member of
the Supervisory Board. Book Value: app. USD 33.5 million.

--ProCredit Bank AD: ProCredit Holding AG with 59.13 percent;
European Bank for Reconstruction and Development with 19.71
percent; Commerzbank AG with 19.71 percent; Book Value: app.
USD 32 million.

-- Sofia Municipal Bank: Sofia Municipality with 67 percent;
Kovachki has a minority interest. Book Value: app. USD 28.5
million.

--Encouragement Bank (Nasarchitelna Banka): Ministry of
Finance with 99.995 percent; Book Value: app. USD 26 million.

--International Asset Bank: Dynatrade International with
25.51 percent; Book Value: app. USD 24.5 million.

--Tokuda Bank: International Hospital Services Co. with 93.84
percent; Book Value: app. USD 21 million.

--ING Bank: Book Value: app. USD 19.5 million.

--T.C. Ziraat Bank: T.C. Ziraat Bank, Ankara, with 100
percent; Book Value: app. USD 17.7 million.

--Investbank AD: Festa Holding with 78.73 percent; Vincom
with 15.49 percent; Book Value: app. USD 15 million.

--Emporiki Bank Bulgaria AD: Commercial Bank of Greece,
Athens with 100 percent; Book Value: USD 14.5 million.

--D Commerce Bank: Fuat Guven ) a Turkish businessman, who
is also the owner of the duty-free gas stations, is now a 100
percent shareholder.  He bought the stake from two physical
persons, also of Turkish origin, in September 2006.  Book
value: app. USD 13 million.

--NLB West-East Bank: Nova Ljubljanska Banka, Slovenia, with
72.51 percent; LB Maxima, Ljubljana, with 24.50 percent; Book
Value: app. USD 12 million.

--Texim Private Entrepreneurial Bank: Paton Anstalt with
27.33 percent; Marieta Georgieva Naidenova with 15.24
percent; Pavlina Georgieva Naidenova with 15.09 percent; Book
Value: app. USD 9.3 million.

--Alpha Bank: Branch of Alpha Bank AE, Athens, Greece; Book
Value: app. USD 5.2 million.

--Citibank N. A.: Branch of Citibank N. A., New York, USA;
Book value: app. USD 4.5 million.

--National Bank of Greece: A branch of the National Bank of
Greece, Athens; Book Value: app. USD 1.3 million.
BEYRLE