Last week Russian investigative journalist Ivan Golunov was arrested on fabricated drugs charges. His newssite Meduza suspected his arrest was triggered by his recent stories about enrichment by Moscow officials and other corrupt schemes. After fierce public protests in Moscow and elsewhere in Russia, the charges against Golunov were dropped and two high police officials were sacked. We republish, in an abridged version, his investigation into private microfinance firms that seized the homes of hundreds of Moscovites.
by Ivan Golunov
In the summer of 2015, Natalia Smelnitskaya was diagnosed with cancer. Despite government assistance and her job at a Moscow consulting company, she needed additional money to pay for an operation. So she took out a personal loan at a three-year 36-percent annual interest rate from Sovkombank for 2.7 million rubles ($41,420), with monthly payments of 80,000 rubles ($1,225). The surgery was a success.
Natalia made her payments on time, but the high interest rate was a heavy burden. When a colleague encouraged her to refinance with a private lender, she did exactly that, reaching an agreement with a company called 'Loan Center 365' to refinance her loan at a slightly more manageable 28 percent. The catch? As collateral, she had to put up her four-bedroom apartment off Yaroslavskoye Highway.
A few days late
According to Natalia, the loan center staff staged a commotion when it came time to sign her refinancing agreement. She says they hurried her when she tried to read the paperwork, and at one point the manager pulled a sheet from the stack of documents and said there’d been an error. Then she reprinted the page and asked Natalia to sign it again. For the next six months, Natalia paid regular 80,000-ruble installments. One month, however, her salary arrived late, and she was a few days overdue with her payment.
On the evening of December 26, 2016, Natalia received an unexpected visit from Anton Titov, an employee at Loan Center 365, who came to inform her that the company now owned her apartment, because of the late payment. Titov quickly reassured her, however, that she could remain in the home while repaying her loan. To keep a roof over her head, all Natalia needed to do was sign a renter’s agreement with Loan Center 365, requiring her to transfer 35,000 rubles ($535) every month to someone named Natalia Kovaleva (who, it later turned out, works at a firm called 'United City Real Estate Service'). Natalia tried to call Loan Center 365, but nobody answered the phones. After finding out about Smelnitskaya’s problems, her employer even tried to repay her loan for her, but the money bounced back from Loan Center 365’s bank account.
As soon as February 2017, Loan Center 365 sold Smelnitskaya’s apartment, and in August that year she lost a lawsuit challenging her family’s eviction. Natalia’s ex-husband and two daughters, ages 13 and 22, were also registered in the apartment, but child protective services did not object to their eviction.
In December 2018, marshals came to Smelnitskaya’s home to evict her family. During this entire process, Natalia says, the new owner’s interests were represented by his mother, while the new owner himself remained in pretrial detention on charges of illegal drug possession. (Meduza’s source in law enforcement confirms this information.) After the family was removed from the apartment, the home was sealed off, with all their belongings still inside. A few days later, when Natalia stopped by to visit her old neighbors, she noticed that the seal on the door was broken, and there were sounds coming from inside the apartment, as if someone was smashing the furniture. Responding police officers arrested several men who claimed that they were helping to haul away what was left inside the home.
Apartment blocks in Moscow. Photo copyright free
Today, Smelnitskaya’s apartment is sealed off, once again, and the local police precinct has opened a preliminary fraud inquiry into the operations of Loan Center 365. In Mytishchi, meanwhile, the company already faces felony fraud charges, though the investigation so far hasn’t led to any results, and the regional prosecutor’s office has tried repeatedly to close the case.
How shady credit schemes work
Loan Center 365 isn’t the only business using these methods to force people from their homes. Meduza managed to find several dozen analogous firms. As a rule, these companies don’t operate for longer than 18 months, before re-registering as new legal entities. According to Meduza’s calculations, these enterprises have managed to evict at least 500 families throughout Moscow and the surrounding region.
The families’ stories are virtually identical. When signing the home equity loan, the client signs over their apartment as collateral or reaches an apartment sale-and-purchase agreement. Borrowers are told that it’s something like a mortgage (sometimes they call it a lease), when the apartment is held as collateral by the bank until the loan is repaid in full. In a bank mortgage, however, the property can only be seized by court order, following overdue payments and visits by collectors, at which point the home is then auctioned off to the highest bidder. When obtaining loans from microfinance companies, victims sign over power of attorney and agree to other conditions that can be used to seize their property without a court order, transferring their apartment to an intermediary, and leaving the client with nothing.
Four easy steps for seizing a debtor's home
- Someone needs a loan, but the interest rates at banks are too hight, ao they go to a microfinance organization that's financed by private investors or banks.
- The borrower receives the money, and in exchange (without realizing it) signs away the mortgage on their home.
- Sooner or later, the borrower violates the terms of the loan, and the creditor seizes the home listed on the mortgage, bypassing the courts.
- The microfinance company sells the home to a stand-in individual (the 'holder'), and that person later sells the home to a real buyer, once the scandal has blown over.
The victims of predatory lenders rarely manage to get their homes back. For example, one debtor produced a schizophrenia diagnosis, which led a judge to nullify his microfinance agreement. In another case where the court sided with a debtor, the verdict describes a story that applies almost perfectly to hundreds of other victims: 'A large number of documents were signed at the [Loan Center 365] office, so that [the debtor] could sign, without reading, a settlement agreement [for his apartment] as part of a number of previously agreed documents. However, the plaintiff did not intend to transfer the apartment to the defendant, which is also indicated by the lack of consent from his spouse,' ruled the Dorogomilovsky District Court, which invalidated the debtor’s settlement agreement with Loan Center 365. The court likely sided with the plaintiff because of his high social status. (A source familiar with the case told Meduza that the lawsuit was brought by a veteran of Russia’s intelligence community.)
Even clients who never fall behind on their loan repayments can still lose their homes. When Svetlana Podelskaya’s beloved summer cottage burned down, her children promised to help shoulder the rebuilding costs. But she decided to handle it on her own, and turned to the International Credit Bureau (MKB) in Moscow’s Brateyevo District for a 600,000-ruble ($9,190) loan, secured on her apartment. She found the company through an online ad. She made all her monthly loan repayments, and after 18 months she got a call from MKB’s manager, who informed her that she was receiving a two-month 'credit holiday,' as a reward for being a 'good debtor.' So Podelskaya skipped her next two payments, and before long a man showed up at her doorstep, introducing himself as the apartment’s new owner. When she confronted MKB, the manager denied having called her, and she had no paperwork to document the 'credit holiday' offer. According to her loan agreement, Podelskaya forfeited her apartment, if she fell behind at least two months in her repayments.
Several other MKB clients have reported similar incidents over the years.
Podelskaya’s apartment was sold to an unemployed man named Denis Baluev. In court, Baluev was asked to reveal the source of the money he used to buy the home. After resisting the request, he finally produced a supplemental agreement to a loan contract with the microfinance company 'Capital Loans' (Meduza obtained a copy of this document). The agreement doesn’t specify the loan amount, which was issued at an unusually low rate of 14 percent. The company Capital Loans shares a business address with MKB, and it’s managed by a Latvian national named Ivan Dubin, who also works at the International Credit Bureau. All three founders of Capital Loans are also Latvian nationals. There are several more companies also registered at MKB’s address, also owned by Latvian nationals who also work at MKB, and each serves a particular purpose. For example, 'Mosarenda' LLC is typically used to confiscate debtors’ property rights.
Of all the predatory companies in Moscow offering home equity loans, the International Credit Bureau has the highest number of victims, according to Meduza’s investigation. Former clients identified 99 instances where the company’s debtors lost their homes, as well as some cases where former homeowners who took loans from MKB could not be located. The main clientele for these enterprises is older people who are neglected by their families, in addition to other vulnerable groups. Even in better circumstances, credit managers try to drive a wedge between potential clients and their relatives.
'Don't tell your children'
Svetlana Podelskaya recalls how managers at MKB advised her not to tell her children about her loan, arguing that young people are biased against loans, and the amount was relatively small, anyway. Her sons only learned that their mother had turned to a microfinance organization when the neighbors called them to say that representatives of the home’s new owner were cutting off the front door to the apartment.
Often, relatives can’t find out independently that an apartment has been signed over as collateral, because microfinance organizations don’t register these contracts with Rosreestr. The actor Sergey Frolov, whose story made headlines in March 2019, learned about his mother’s home equity loan several years after her death, when he discovered that the apartment he’d inherited from her had been sold at auction. Before she died, Frolov’s mother borrowed 600,000 rubles ($9,215) at a 28-percent interest rate from MKB, but her pension wasn’t enough to cover the monthly installments. Her loan paperwork, however, contained an income statement that significantly exceeded the amount of her retirement earnings. When the elderly woman couldn’t make her monthly payments, MKB convinced her to accept a 1.2-million-ruble ($18,445) loan, secured on her apartment. When she died, MKB seized her home to cover her unpaid debt.
in Moscovites protesting against the demolition of cheap apartment blocks. Photo twitter
The International Credit Bureau has a great deal in common with another credit organization: the Moscow Mortgage Company (MZK), which operates according to similar principles. In the fall of 2016, videos appeared on YouTube, recorded at some kind of staff meeting, discussing how to explain to clients the need to sign over their apartments as loan collateral, and how clients should be given incomplete copies of their loan agreements. The name of the business isn’t mentioned in the video, but the Moscow Mortgage Company later got a court to have the footage blocked in Russia. The identity of the staff member leading the seminar isn’t clear in the video, but several MZK clients told Meduza that they believe it’s Nikolai Chigarev, the company’s deputy general director.
In 2015, both MKB and MZK started appearing frequently in news reports, as the number of cheated clients grew large enough to cause a public scandal. The two businesses filed defamation lawsuits (even against state news pundit Vladimir Soloviev), losing case after case. In November 2015, MZK’s ownership was transferred to the offshore company 'Lordena Ventures,' which was registered in the British Virgin Islands.
This organization appears in OCCRP’s famous 'Panama Papers' investigation, which was based on documents leaked from the Panamanian law firm and corporate service provider 'Mossack Fonseca.' According to those documents, Lordena Ventures had an office in Latvia, located in the Rietumu bank building in Riga. Oksana Utenkova, an employee at the bank, was listed as the company’s representative.
Latvian banks played an important part in schemes to move money out of Russia. In their 'Laundromat' investigative report, journalists at Novaya Gazeta and OCCRP explained how these institutions were used to withdraw more than $18 billion from Russia over three years.
Lifespan is 18 months
The average lifespan of a microfinance institution that issues home equity loans is about 18 months. Buying a turnkey microfinance company, already registered with Russia’s Central Bank, costs anywhere between 140,000 to 250,000 rubles ($2,160 to $3,850), depending on the enterprise’s history. On specialized Internet forums, you’ll find numerous listings for ready-made MFOs. These companies change their names, while maintaining the same staff, 'holders,' and private investors, whose financing is used to attract debtors.
The company 'Loan Center 365,' where Natalia Smelnitskaya borrowed money, was created in February 2016 by Anna Sukhanova. According to the Spark-Interfax database, Sukhanova has founded 21 microfinance companies. Meduza found for-sale listings for several of these firms online. A few months after Loan Center 365’s creation, the firm was transferred to Anton Velichko and Latvian national Yulia Kalinina.
Smelnitskaya was one of Loan Center 365’s first customers, signing 'contract number four.' According to Meduza’s findings, the company entered into at least another 67 loan agreements between the summer of 2016 and February 2018. Reviewing the records filed with Rosreestr regarding the property owned by the company’s clients, Meduza discovered that 25 of 37 debtors sold their property soon after receiving their loans. In 15 cases, the homes were sold directly to Loan Center 365. Another six homes were sold to Anton Titov (an employee at the firm), 'M2-Leasing' CEO Anatoly Fundobny, and Vladislav Snopok (the son of the president of the insurance company 'Capital Life'), with each man acquiring two apartments.
A law against the 'evictors'
In early May 2019, a job posting appeared on the website HeadHunter for the position of 'evictor,' with a starting monthly salary as high as 160,000 rubles ($2,466). The core responsibilities included: 'Collecting overdue debts on home equity loans, and organizing the eviction of debtors from mortgaged real estate.' The vacancy was posted by the microfinance company 'Brighton Plus,' which calls itself one of the leaders of Russia’s home equity lending market. Brighton Plus says it issues loans worth 100 million rubles ($1.5 million) every month, made possible by 'vigorous investor financial support.' According to Russia’s Unified State Register of Legal Entities, the company is owned by four people, most of whom have no business experience.
Many clients of these two businesses have also lost their homes. There are currently 242 court cases involving Brighton Plus and Alpha Potential-M filed with the Moscow City Court. Experts argue that microfinance institutions have been able to fool debtors out of their homes so often because the industry is under-regulated. 'For years, MFOs have enjoyed a comfortable regulatory environment without limits on loan interest rates, which have exceeded 800 percent a year. Existing regulations do not prevent microfinance organizations from using questionable schemes to legalize their income. Several years ago, the owner of one MFO was arrested for cashing out federal subsidies paid to multiple-child families. The requirements imposed by the Central Bank and the control over the activities of more than 2,000 MFOs are far lower than the regulations enforced against [Russia’s] 473 banks,' says Dmitry Yanin, the head of the International Confederation of Consumer Societies.
'Microfinance organizations are subject to the law against the legalization of criminal proceeds, but the Central Bank and the Federal Financial Monitoring Service exert less control over their work than they do over banks,' agrees Rostislav Kokorev, the head of Moscow State University’s Financial Literacy Laboratory.
But the situation seems to be changing. In April 2019, lawmakers in the State Duma introduced draft legislation that would ban microfinance institutions from issuing home equity loans to individuals. Technically, this bill would amend Russia’s existing law against the laundering of illegally obtained income and financing terrorism, and regulations on microfinance activities and microfinance institutions. Judging by the legislation’s coauthors (which include the speakers of both houses of parliament, Vyacheslav Volodin and Valentina Matviyenko), the bill has a good chance of passing.
Translation by Kevin Rothrock
The original article in unabridged form can be read here at Meduza.io