INDONESIA’S ROGUE BANK: ‘CLIENTS OFTEN CARRY LARGE BAGS … EMPLOYEES THINK IT COULD BE CASH’

In a country replete with financial scandals, there are few with as many twists and turns as Bank Century, whose near failure in 2008 spurred fears of a systemic collapse of Indonesia’s financial system before it was taken over by Bank Indonesia, the central bank, and fashioned into what became Bank Mutiara.

The  bank is now known as Bank J Trust and is owned by a Japanese parent that was born out of that country’s pachinko industry. Over the past three years, the bank has lost about US$50 million a year for a total of US$103 million, raising concerns that given Indonesia’s lax banking regulatory regime, the losses were to cover money laundered out to other countries, particularly Cyprus, a state known for warehousing Russian and other flight capital.

Subsequently the new J Trust owners bought into an obscure motorcycle-leasing operation in Thailand, eventually driving the stock to 100 times earnings via what appeared to be financial legerdemain before an auditor’s report brought the shares back to earth. According to a letter obtained by Asia Sentinel, they are now exploring motorcycle leasing across eastern Europe and Africa, from a new base in Cyprus, stirring concerns they would be charging usurious rates.

Investors in the Japanese parent include the Kirkland, Washington-based Taiyo Pacific Funds LLP, whose CEO and founding partner is Brian K. Heywood, and include Wilbur Ross, the Trump administration’s commerce secretary, formerly known as the “king of bankruptcy” for buying up distressed companies and selling them off later. The California Public Employees Retirement System, or Calpers, is also an investor.

Inauspicious Beginning

The story began in 2002 when three smaller banks were merged to create Bank Century – although allegedly it didn’t meet the most basic capital and other Bank Indonesia requirements for a banking license, conditions for which had been drastically tightened in the wake of multiple bank failures during the Asian financial crisis, 1997-99.

When the 2008 global financial crisis hit, the government poured US$830 million into Bank Century to keep it afloat, only to have at least US$350 million in bailout funds disappear out to Singaporean banks. Its beneficial owner, Robert Tantular, eventually was sentenced to 20 years in prison – although, with Indonesia’s porous prison system, he has often been seen on the outside.

The effort to save Bank Century cost Sri Mulyani Indrawati, then Indonesia’s globally respected finance minister, her job when political forces opposed to her reform efforts ganged up on her in the parliament and accused her of corruption.

Former Bank Indonesia Deputy Governor Budi Mulya was sentenced to 14 years in jail for corruption in the case for having taken a Rp1 billion loan (US$75,000) from the bank when he headed the central bank’s monetary operations and acted as chief auditor and regulator of the bank. According to sources in Indonesia, Budi and 22 auditors from Bank Indonesia were inside, monitoring Bank Century when the money disappeared.

 Expert Alleges Money Washed to Cyprus

The money that vanished, a major part of which has been widely rumored in Jakarta to have been slush funds of the Democrat Party headed by former President Susilo Bambang Yudhoyono, has never been recovered.

According to a 67-page report dated Aug. 14, 2014 by money laundering expert Peter Barrie Brown, who was commissioned by Quinn Emanuel Urquhart & Sullivan UK, lawyers for Bank Mutiara, it appears that some of it was laundered out of Bank Century in 2008 and again out of Bank Mutiara in December of 2014 in a bewildering series of transactions between the Cyprus branch of a Tanzanian-based bank then known as the Federal Bank of the Middle East (FBME Bank), whose beneficial owners were Ayoub-Farid M and Fadi M Saab,  Lebanese brothers whose banking methods, according to African media are interesting to say the least:

“The clients come to the bank as if they are coming to a meeting, and often carry large bags in their cars. They would go to the fourth floor of our new building, which has state-of-the-art technology,” an employee who asked not to be named because he wasn’t authorized to speak to the media, told the Nairobi-based East African weekly newspaper. “Nobody really knows what is in the bags, but some employees speculate that it is either minerals or money…we have also heard some from some of our clients that the brothers are involved in gold trade in the DR Congo and Kahama, a mining town in Tanzania’s lakeaf zone region.”

In his report, which is in the public record at the New York Second Circuit Appellate Court, Brown said “the number of separate reasons for being suspicious are so many in total that I rate the whole arrangement and its operation to be the greatest collection of suspicious circumstances I have ever encountered in real life.”

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Source: Barrie Brown expert report

In 2014, the Financial Crimes Enforcement Network, a unit of the US Department of the Treasury, accused FBME, which is headquartered in Tanzania, of facilitating money laundering, terrorist financing, transnational organized crime, fraud schemes, sanctions evasion, weapons proliferation, corruption by politically-exposed persons and other financial crimes, particularly by the Russian Mafia and Hezbollah.  After the accusation, the Central Bank of Cyprus and the Bank of Tanzania respectively took over management of the bank and appointed new administrators.

Indonesia Dumps Failing Bank

Meanwhile, in Indonesia, Bank Mutiara itself continued under the administration of the Deposit Insurance Corporation, a quasi-government corporation that insures depositors’ savings. It was hemorrhaging cash when the government put it up for sale. In 2014, the bank was reported in local media to have been sold for US$363 million to J Trust Co Ltd., whose antecedents were in the Pachinko parlor business and gaming, which are notoriously connected to the yakuza, Japan’s organized crime societies, and was rebranded as PT Bank J Trust Indonesia.

Before it could be sold, the government first had to inject US$104 million in early 2014 to maintain stated capital at US$50 million. Twenty-one bidders melted away after two rounds of bidding only to have J Trust move into the process at the last minute, taking it over in September of 2014 at an indicated cost of US$363 million – six times the stated book value..

Strangely, there is no record of US$363 million ever leaving the J Trust balance sheet either in the remaining quarters of 2014 or fiscal year 2015/2016. Yet shares were transferred to J Trust on Nov. 20, 2014, the six-year anniversary of the expropriation of the bank and the mandatory deadline to sell.

The recorded price, inclusive of US$240 million of capital and subsequent injections through last week, was said to be the highest ever paid for a bank in an emerging market, according to an analysis by Bloomberg.

That raised questions why a Japanese firm was willing to pay more than US$350 million for a bank with virtually no assets, a huge debt load and a history of money-laundering and corruption. The sale price is believed to have been the highest book-value premium for a bank in the history of Southeast Asia.

After taking over the bank, J Trust Bank recorded losses in US$52 million in FY2014, US$51 million in 2015 and US$48 million in 2016. However, J Trust in late March moved to counterbalance those losses by injecting a further US$75 million (Rp1 trillion) into the bank’s capital base and for the first time doing it on a dilutive basis.

That is a curious development and strategy as they already own and control more than 95 percent of the bank’s stock, with its partner Group GL Finance owning about 3 percent. Thus diluting themselves and their partners, costing them a fortune.

The answer lies in their recent Jakarta Stock Exchange announcement that the US$75 million investment would be injected at a value of 10 percent of the entire stock capital base of Bank J Trust, effectively valuing the bank at a whopping US$750 million, or RP9.9 trillion.

That has created a bank value on paper that now exceeds J Trust’s purchase price by more than US$380 million, generating a huge non-cash book profit and giving the illusion that the bank is actually worth US$750 million.

Massive Losses in Thailand

That book profit may be necessary to cover massive losses in Thailand where, in 2015, J Trust virtually took over a Thai penny stock company called Group Lease Pcl, which provides leases for poor peasants in Thailand and Cambodia to buy motorcycles at usurious rates.

Over the intervening months, J-Trust agreed to buy Group Lease convertible bonds that drove the company’s market cap to US$2.9 billion although the company had only US$482 million in assets. At that point  Group Lease shares were trading at almost 100 times estimated earnings, according to a Bloomberg wire story published in the Bangkok Post.

Eventually the Thailand arm of the Ernst & Young accounting firm reviewed the 2016 financial statements for Group Lease and issued nine pages of qualifications raising concerns over intercompany loans to an unknown affiliate in Singapore, which in turn loaned out close to US$100 million to other affiliates and related parties in Cyprus and Singapore whose names Group Lease executives refused to disclose. When the Thai authorities asked for an explanation, the shares plummeted by 56 percent.

J Trust has invested more than US$220 million into Group Finance since 2015, increasing its market value from US$250,000 to US$2.9 billion in December 2016, but not for long. It has fallen spectacularly since the Ernst & Young qualifications were reported by Khao Yoon, a leading Thai newspaper, and Bloomberg. Group GL Finance’s market value plummeted to less than THB35.5 billion, wiping out US$2 billion of market capitalization and destroying J Trust’s implied noncash gains on it GL convertible bonds and stock holdings going into its fiscal year end of March 31.

The ties between Bank J Trust, J Trust and FBME Bank Cyprus were well documented as a money laundering operation in the Peter Brown report mandated by Quinn Emanual. Group GL recently announced it is extending its operations into Cyprus. A small Thai company that has moved from leasing motorcycles to financing solar panels and farm equipment in Indonesia is now expanding their unique business model to Cyprus, Russia and eastern European leasing and banking.

With advisors like WL Ross and Co., Invesco Capital and Taiyo Pacific on board, as advisers to J Trust, it now may be time to move into the big leagues and minimize the pachinko parlor gaming business. Leasing and money transfers between Indonesia, Japan, Thailand, Korea and now Cyprus are where the money really is.

– Asia Sentinel