In October 2019, Mongolia was included in the FATF Grey List for the third time. A spokesman for the European Union (EU) made a statement in November that being in this list for long leads to an inclusion in the EU Blacklist. Eventually, it became true. The EU has been compiling such a list since 2017 to keep the financial systems of its 28 member states healthy and safe, and to prevent money laundering and terrorist financing.
Shortly before being included in the FATF’s Grey List, I highlighted in my article “Grey Government” which 4 of the 11 recommendations set by the FATF have not been met. The Bank of Mongolia (BOM) recently declared that Mongolia had fulfilled half of them and reported it to the FATF in February.
Even though the BOM does not specify which recommendations have not been fulfilled, it is not hard for scholars to guess. These include: “Properly inspection, monitoring and regulation on financial institutions by regulatory authorities” (the third), “Money laundering cases shall be investigated, and criminals shall be punished in an effective and appropriate manner” (the seventh). The seventh recommendation refers to the long-standing “cancer” in the body of public governance, namely the corruption that has taken the Mongolian state hostage. Even with the new president and judiciary, the hoped-for cure was not achieved. This happened because the basis for the seventh recommendation is directly related to the third recommendation, which is the poor supervision of the BOM.
Bank kingdoms
Since the establishment of the two-tier banking system in Mongolia, most of the 30 commercial banks created, according to the BOM, have gone bankrupt “due to their own failures in accordance with the laws of the market”. Today, 13 commercial banks are operating. Along the way, far too many people have fallen victim. The first tier represents commercial banks (CBs), and the second – the Central Bank, which is responsible for supervising those banks and does not operate as a CB. Unfortunately, in Mongolia, the two tiers are mixed now, with the Central Bank trading and the CB apparently controlling the BOM.
First, reality shows that the BOM is unable to control the CBs. The BOM Supervision Department is supposed to review the activities of each CB on an annual basis and ought to inspect all account transactions. The audit should identify irregularities, take precautionary measures, and warn the management of this bank.
In light of this situation, many banks went bankrupt and today, Mongolia is on the international Grey and Black Lists. These incidents confirm that the BOM’s supervision has adopted pseudo-control and their work has been associated with desperation, discrimination, and illegal activities. The biography of the ones who appointed the management of the supervision authorities, must be made public with the indication of previous places of work.
The former chairman of the BOM and the Financial Regulatory Commission have been replaced after the inclusion in the Grey List. Nonetheless, the new administration does not demonstrate any changes, none that would be felt on the economics. And now, Mongolia is included in the other black list.
The whole world agreed that as nine-tenths of the total assets of commercial banks are public and only one-tenth are owned by their holders, their activities should be transparent to the public. However, no one has known the identity of the sole owner of Mongolia’s largest commercial bank for many years. Even though we had the opportunity to take a look at him during his arrest a year ago, he soon fled across the border and completely vanished. The Minister of Justice, Ts. Nyamdorj, has repeatedly stated that D. Erdenebileg conspired with government officials to take advantage from buying properties by using public money, as was clearly shown in the 49 percent case of Erdenet and Monrostsvetmet. However, most media outlets nowadays are afraid to talk about it, and the judiciary has “completely forgotten” him. L.Oyun-Erdene, a member of the Parliament and head of the Cabinet Secretariat of Government of Mongolia, recently stated that nowadays the accused have gone brazen and are running for election. The Mongolian state’s tragicomedy continues …
Second, the government borrowed billions of dollars from abroad and spent them inefficiently and secretly, leaving the country in a debt trap and paying off debts with other debts. At an impasse, we asked the IMF for money. The only condition set by this fund was to increase the capital of commercial banks, improve their skills and rankings. The BOM failed to accomplish this. International organizations have not acknowledged that commercial banks have suddenly “increased” their capital in cash of unknown origin. What happened after was kept secret, with the BOM keeping its head down and the IMF aid stalled.
Third, another well-known illegal practice is that high public officials are using budget money to profit from higher interest rates, transmitting it through the commercial banks. The bankrupt Capital Bank is a clear example of the loss of hundreds of billions of MNT in social insurance. The victims are depositors, pensioners, and taxpayers. Who would believe that BOM supervisors were not aware of all this from the beginning? Was it advantageous for them to “turn a blind eye”?
Fourth, it has been two years since a law was passed banning commercial banks from doing other business. The Bank of Mongolia seems to have forgotten about this. Owners of commercial banks are running their non-bank financial institutions (NBFIs), media, construction, heavy and light food industries, car dealers, and road infrastructure companies with low-cost financing, competing with bank customers and are bankrupting them, one after another.
Fifth, members of parliament, ministers, government officials and staff of BOM are known to have their own NBFIs, which are being used for usurping money by taking low-interest money from the state budget and lending it with higher interest rate. A clear example is the notorious case of SMEs (Small and Medium Enterprises). Even if the BOM issues a law that prohibits to hire such people, it would remain a secret whether it will be implemented or not. Generally, political parties decide who to appoint at the management level of the BOM. The seats of vice presidents are reserved today only for the descendants of political leaders.
The BOM has a procedure with a fancy label called ‘currency swap’, which is used for getting a low-interest foreign currency loan and subsequently lent to their partners. Some large companies have become accustomed to misappropriating low-interest foreign currency loans from abroad, thereby devaluing the tugriks through their personal accounts.
Why is the interest rate not decreasing?
As a result of the mix of commercial and central bank functions, huge amounts of loose money are circulating in the banking system at high-interest rates. Everyone can see that commercial banks are racing to allow the state-born billionaires to keep their money at the highest interest rates, which has raised interest rates on bank savings and loans. Interest rates could not be reduced due to the over-concentration of savings for a small number of people.
The recent arrest of the former director of the Health Insurance Fund is a clear indication of how officials have been circulating state funds. Because the Khan Bank imposed a fine of 1.8 billion MNT for not depositing 100 billion MNT on time, now its owners are being checked. The BOM did not know this either. If they had known, not the IAAC, but the BOM would have released this information first.
Korean banking reform
In 1997 the IMF launched a $ 58 billion package following the South Korean financial crisis. Of the 27 commercial banks, two were insolvent and 12 were short of capital. Two systemically important banks were taken over by the state, five small banks were liquidated, and some small banks were merged with large ones. In four years, state ownership in the banking sector has risen from 33 percent to 54 percent. Five national and 3 local bankrupt banks were added to the state. In 2000, four state-owned banks, Hanvit, Peace, Kwangju and Kyongnam, were merged. The following year, Kookmin and Housing, which account for a third of the market with total assets, agreed to merge.
Thus, banks were restructured and recapitalized, non-performing loans were cleared. To do all this, a huge amount of money in the financial system, or 30 percent of GDP, was provided by government bonds and the state budget. The state soon privatized the banks it had acquired. Domestically, only the richest families (chaebol) had money. However, the law prohibiting that non- financial institutions owning more than 4 percent of the voting shares in commercial banks was introduced. Moreover, the public believed that the financial crisis was due to the excessive lending to chaebols.
All that remained was to make an offer to foreign investors. The laws and regulations that made the market inaccessible to foreigners, were amended. Therefore, the country opened its financial markets. In December 1999, Korea First Bank sold 51 percent to the NewBridge Consortium, in 2001, KorAm Bank sold 40.7 percent to the American Carlyle Group and in 2003, the Korea Exchange Bank sold 51 percent to the American Lone Star. In eight years, the market share of foreign-owned banks had risen from 8% to 31%. In 2002, 100 percent state-owned Seoul Bank was sold to Hana Bank, in 2003, 80 percent state-owned Chohung Bank and 95.7 percent state-owned Jeju Bank were sold to Shinhan Bank.
These actions were short-term measures to rehabilitate and stabilize the financial sector. Some people saw the reform as a good thing to put an end to crony capitalism, while others argued that it saved banks with taxpayers’ money, threw a party for foreigners, and discriminated against domestic investors. This major change was successful because of the intense political aggression and widespread public criticism. Since then, the Won has been stable for a long time.
Mongolian reflection of the Korean exit
We have something to learn from the experience of the Korean banking sector overcoming the crisis. It exemplified how the lobbying and interests of political and economic groups can lead to a crisis in the banking sector. However, instead of looking straight at it and fixing it early on, the banking sector is digging a deeper and deeper hole to bury itself. Some banks have unlimited rights for one person. Some people even have three banks. For example, the Trade and Development Bank, Capitron and Ulaanbaatar Bank have one single owner. Regarding this, the BOM was also silenced.
A month before the election, a frustrated member of Parliament argued that the bank should be reformed to have at least five owners, not just one. If the next parliament can pull that off, commercial banks will be open, transparent and under public scrutiny. But the experience of Korea can be particularly useful. Direct confiscation of personal property is prohibited by law. If civil society and the media do not push for such reforms, there will be no change incited and, interest rates and unemployment will not decrease.
In order to keep the banking sector healthy, the Bank of Mongolia must first fulfill its role of supervising and holding commercial banks accountable, and the Mongolian law and judiciary must be fair. The Mongolian court must stop sport fishing (catch fish for fun and put it back in the water)!
2020.05.14
Trans. by Riya.T and Sungerel.U