Bad Loans Backfire
Between 2007 and 2010 the Central Bank sent six teams of top-notch examiners and hired auditor PricewaterhouseCoopers (PwC) to look into the operations of First Bank.
They found a lot.
Seven secret reports OCCRP obtained show that the family bank repeatedly broke the law and approved loans against its own policy and in violation of good banking practice to benefit a number of Djukanovic’s business partners, relatives and friends. Some of the biggest violations included the loans to Subotic’s companies.
At the time the first loan was approved, Subotic’s San Investments was newly formed and had no income, or business plan, which are basic requirements for banks to even consider a loan. And it approved a long grace period before making any payment due.
Other San Investment loans also were problematic, and some even allowed lump sum payment at maturity. First Bank kept poor documentation and could provide no evidence for its claim to examiners that San’s loans were secured with deposits.
While fully aware the total value of loans given to San Investments by far exceeded the allowed limit - 25 percent of bank's own capital – the Djukanovics' bank hid this information from examiners to avoid sanctions.
In one instance, the bank said it had given only one loan to San Investment, while examiners found four. On a number of occasions, the Central Bank ordered First Bank to stop its risky practices and comply with the law.
It did not.
With millions locked up in bad loans, in January 2008 the bank started experiencing liquidity problems. At the same time, international markets were roiling and international stock markets started a decline that would wipe out one third of their value. The Great Recession was starting and investment money dried up overnight. Real estate prices went into freefall. By the spring, First Bank was in serious trouble and unable to honor withdrawal requests from depositors. Much of the government money loaned out to Djukanovic’s friends had been lost.
On April 28, 2008, Subotic was arrested at Moscow’s Sheremetyevo Airport. Despite Interpol’s Red Notice, he had had no problems getting a visa. Serbia requested his extradition, but Russia refused and two months later, on June 26, Subotic was released.