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. Last Updated: 07/27/2016

Billions in Taxes Tied Up in Sick Banks

Back taxes now worth about $760 million have been piling up rapidly in Russia's ailing banks, largely because some businessmen and bank managers are conspiring to exploit loopholes and delay payments indefinitely.

In all, 17 billion rubles in tax payments ($760 million at Wednesday's exchange rate) are frozen in the Russian banking system, said State Tax Service chief Georgy Boos in a recent interview - a sum exceeding the 14.5 billion rubles in taxes the authorities collected nationwide last month. Much of that money may well be unrecoverable.

The amount of trapped-in-limbo tax payments has been snowballing for months. As of August, Moscow's 660 banks had failed to hand over some 208.7 million rubles in tax payments entrusted to them. Within three months, that amount had increased nearly six-fold to 1.2 billion rubles in November. Two months later, it had again ballooned - by more than 14 times.

In all, the amount of rubles paid as taxes but instead piling up in troubled banks has grown 85 times since the August crisis. "It is still growing," said Yury Lavryonov, a spokesman for the Moscow Tax Inspectorate. He named SBS-Agro, Toribank, Rossiisky Kredit, Inkombank, Unikombank, Tokobank, Menatep and Dialogbank as among those sitting on large, delayed tax payments.

But does this explosion in would-be tax payments represent some rush of patriotism or support for the government? Apparently not. Analysts, tax authorities and bankers said that the growing pile of tax payments trapped in troubled banks are a consequence of complex financial scams to cheat the government. Common in 1994 and 1995, another period of epidemic bank failures, such scams have again returned to haunt the Russian economy.

"This business is thriving," said a local banking expert who asked not to be named. "Many local brokers are using different illegal schemes."

Cheating the government is easy because under Russian legislation, a bank statement indicating a company has ordered the bank to wire money to the government is proof enough that one has paid taxes, said Pavel Zotov, a spokesman for the recently bankrupted Tokobank. Proof that the cash actually got there is superfluous, he said.

Zotov outlined the simplest and most popular such scheme:

Company A has an outstanding tax debt. It opens, or already has, a zero-balance account in a troubled bank. It approaches Company B, which has cash frozen in an account in that same troubled bank, and buys the assets in B's unaccessible account - for a discount, of course. As B is already unable to get to this money anyway, it is willing to take some cash in return for transferring these useless paper funds around inside the bank.

Company A then orders the bank to pay its taxes with this money - knowing the bank will be in no hurry to pay, or perhaps even conspiring with bank managers to guarantee that.

"The company [B] has lost its money anyway and will be happy to get at least something," Zotov said. "So you pay it, say, 30 percent of the transfer amount in cash and save 70 percent on your tax payment."

While Zotov admitted that some taxes were frozen in Tokobank, he denied that his bank was taking part in such schemes, and noted that it has been formally bankrupted and placed under state-imposed management.

Such tax payment scams were halted in 1995, when the tax police ruled that companies would be liable for any debts that their banks failed to deliver to the state. But just before the August ruble devaluation and debt default that sent the banking system spinning, a Russian constitutional court ruling reversed that. The court ruled that the bank, and not the bank's customer, would be liable in such situations.

Since that ruling, such schemes - which are technically legal - have multiplied, said Sergei Sitnichenko, deputy head of the Rating Information Center. "The one and only way to fight this problem is to bankrupt bad banks," Sitnichenko said.

But the law on bank bankruptcies, originally passed last year, is still in legislative limbo. It was vetoed by President Boris Yeltsin in October. This month, State Duma deputies overrode Yeltsin's veto. The draft law now goes to the Federation Council, which can force Yeltsin to sign it into law with a two-thirds vote. No date has been set yet for a Federation Council vote.

Meanwhile, the government is struggling to convince the International Monetary Fund and other sources of help that it can collect enough taxes to cover its planned 1999 expenses.

In October, the Central Bank pumped tens of billions of new rubles into selected banks in a series of complicated debt swaps aimed at resuscitating the banking sector.

This drastic and inflationary tactic was partially motivated by the need "to get tax payments out of banks," Sitnichenko said. He added that only "an insignificant sum" made its way into the Russian budget after those settlements.

The Central Bank's press office declined to comment on the success of its October debt swaps at freeing up trapped taxes.

Some analysts expressed guarded hope that these tax scams would gradually fade.

"Such business is not endless," said a local banking expert, who asked not to be named. "The tax service will eventually put an end to such banks and it is impossible to launch a new bank to do such things now. So this business will finish when the tax police raid the bank and put everyone there face down at gunpoint."

The tax police do audit banks and companies involved in such schemes, said Yury Tretyakov, deputy head of the public affairs department of the Federal Tax Police. But they only do so after collecting sufficient evidence.

"We, as well as the Moscow tax police, have special departments to handle this situation," Tretyakov said. He gave no further details.