IN THE last 20 years more than 40 Croatian National Bank (HNB, Croatian central bank) employees have traded in securities of banks which are supervised by the HNB. Over 400 transactions worth more than 10 million kuna have been recorded.

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Index Istrage (Index Investigations) have learned, through insight into historical transactions of the Central Depository Agency (SKDD), that the current HNB governor Boris Vujčić, his current deputy Sandra Švaljek, ex vice governors, current and ex HNB executives and other employees are among those who have participated in this trade over the last 20 years.

This is the biggest scandal in the banking system so far. It seems that foreing regulators, such as the European Central Bank (ECB) and the European Banking Authority (EBA), will have the final say in this case, because everything points to the conclusion that this is a criminal offence of abuse of privileged information. This type of trade is also strictly prohibited for employees at the European Central Bank.

HNB employees have privileged information about banks whose stocks they trade in

The HNB supervises other banks by collecting and analyzing reports and information, and it monitors their business activities continually. This means that HNB employees possess business information about banks, which is not available to the public, and on the grounds of that information they are able to make decisions about trading in securities of those banks. This fact explains why HNB employees shouldn’t trade in securities of banks which they monitor directly.

The abuse of privileged information is defined in the Criminal Law as follows:

(Abuse of privileged information, Article 259:

(1) Whoever by possessing inside information:

1. acquires or disposes of for his or her own account or for the account of a third party, either indirectly or directly, a financial instrument to which that information relates;
2. discloses, tells, hands over or otherwise makes available without authorisation inside information to another person;
3. recommends to or induces another person to acquire or dispose of a financial instrument to which that information relates,

shall be punished by imprisonment not exceeding three years.

(2) If the criminal offence referred to in paragraph 1 of this Article is committed by a person who possesses inside information by virtue of his or her membership of the management or supervisory bodies of the issuer, or by virtue of his or her holding in the capital of the issuer, or by virtue of his or her having access to the information through the exercise of his or her employment, profession or duties, or by virtue of his or her criminal activities,

shall be punished by imprisonment from six months to five years.

(3) If as a result of the criminal offence referred to in paragraph 1 of this Article a considerable material gain is acquired or considerable damage is caused to another,

the perpetrator shall be punished by imprisonment from six months to five years.

(4) If as a result of the criminal offence referred to in paragraph 2 of this Article a considerable material gain is acquired or considerable damage is caused to another,

the perpetrator shall be punished by imprisonment from one to eight years.

Part of the Criminal Law)

European Central Bank strictly prohibits employees from trading in any kind of bank securities

The HNB is a member of the European Central Bank, which strictly prohibits its employees from trading in any kind of bank securities. So why are they doing this in the HNB? Especially the executives, who must be familiar with the rules of their head organization (ECB) and the laws concerning trade in privileged information. Moreover, the HNB’s Ethical Code itself states that its employees should not trade in securities of banks which they supervise.

When we asked the HNB about this practice, they told us that, according to their own law, The HNB Law, the heads of the bank are prohibited from trading in the banks stocks, but they are allowed to trade in bonds of those banks. Interestingly, in their response they stated they will also ban the trade in bonds, starting from March this year.

We also asked them if they had noted any cases of illicit trade in banks securities so far, and their answer was negative. After that we confronted them with names of their employees, specific dates and titles of the banks securities. They replied that they will carry out further analyses based on the information we have provided.

But first things first.

How does the HNB supervise banks and which information does it possess?

The supervision of banks which operate in Croatia is one of the fundamental duties of the HNB. It also issues business permits to those banks. The HNB checks if credit institutions are operating according to set rules and standards. It does so by monitoring their work, collecting and analyzing reports, carrying out on-site inspections of credit institutions’ business, calling for supervision measures and, at last, issuing its opinions, authorisations and approvals, and by assessment of credit institutions.

According to the current HNB Law, HNB officials, the governor, deputies, CEOs and members of the Council, should not possess stocks or shares in legal entities which the HNB supervises.

When Croatia joined the European Union, the HNB became a part of the European System of Central Banks (ESCB), which consists of the European Central Bank and the central banks of all 27 member states. The European Central Bank is the core of the ESCB and the Eurosystem.

ESCB employees are explicitly prohibited from making financial, i.e. investment transactions connected to the banks. Article 18 of the HNB’s Ethical Code, which defines conflict of interest, also prohibits employees from possessing stocks of financial institutions which HNB supervises and to which it issues business permits.

No one has been penalized for trading in securities of banks they supervise

Index Investigations research has shown that, despite these bans and potential abuse of privileged information, which is punishable by Croatian Criminal Law, and despite the potential conflict of interest, more than 40 HNB employees have traded in securities of the banks they supervise and to which they issue business permits. Two employees have carried out almost 50 different transactions connected to those banks, and the overall number of 400 transactions, carried out by more than 40 employees, shows that trade in the banks securities is a rule, not an exception.

During our investigation we made an inquiry to the HNB if any of their employees had traded in the banks securities and how the bank handled these cases.

“The governor and members of the HNB Council are not holders of stocks or shares in legal entities which the HNB supervises. Also, the governor, Council members and CEOs are obliged to report in regular intervals in order to confirm they are not in conflict of interest according to relevant laws and legal provisions,” stated the HNB in their first response, which means that so far no one in the HNB has been processed for trade in securities of banks.

How did Vujčić, Švaljek and the rest trade in securities?

Our next inquiry on this topic contained specific names of people involved in the trade. The first is governor Boris Vujčić, who traded in stocks of Erste Bank and Zagrebačka banka (Zagreb Bank, ZABA) in 2001, while he was the deputy governor of HNB.

We also mentioned Sandra Švaljek, the current deputy governor, who traded in bonds of Erste Bank in 2012, while she was a member of the HNB Council. We have found that she presented these bonds as inheritance.

We provided the names of HNB employees who are listed as the governor’s advisers as well, particularly Davor Holjevac, who is employed at the HNB and had been its vice governor until 2012. He traded in Erste Bank’s bonds while he held that position.

“Boris Vujčić bought Riječka banka (Rijeka Bank) and Zagrebačka banka (ZABA) stocks during the 1990s, when he wasn’t deputy governor or member of HNB Council, but also in the period when the HNB Law did not prohibit the governor or members of the Council to possess stocks of banks which HNB supervises.

The new HNB management initiated changes in the HNB Law in 2000, which prohibited its governor, members of Council and CEOs from possessing stocks and business shares in banks under HNB’s supervision,” replied HNB. They added that, in the meantime, Erste Bank bought Riječka banka, and Vujčić sold Erste and ZABA stocks in March 2001.

Vujčić possessed stocks while the Croatian law allowed it

“Vujčić had sold the stocks one month before the new HNB Law provisions were put into effect, which was also stated in the media at that time. Therefore, the HNB governor did not breach any of the law provisions, and he had sold the stocks before the new HNB Law, which was initiated by the management he was a part of, was put into effect,” states HNB in their response.

But the fact remains that, before he became deputy governor, Vujčić had been one of the HNB executives in the 1990s. The European Central Bank, founded in 1998, since its outset has had the rule prohibiting its employees from possessing and trading in financial institutions stocks, because of conflict of interest and potential abuse of privileged information.

Švaljek immediately invested her millions worth of inheritance into Erste Bank bonds

The explanation of Sandra Švaljek’s case is even more interesting. Namely, Sandra Švaljek was an external member of the HNB Council from 2000 to 2013. On November 23 in 2012 she bought Erste Bank’s corporate bonds and she kept them until maturity in 2017, i.e. until the disbursement of the bonds:

(RECORDS ON BUSINESS SHARES, STOCKS OR SECURITIES

Share type: Other securities
Business subject’s personal identification number (OIB): 23057039320
Security type: bond
Ownership form: Personal
Business subject: Erste&Steiermärkische Bank d.d.
Business subject’s headquarters: Rijeka
Security’s nominal value (HRK): 2.542.458,00
Acquisition manner: Inheritance

The information in Sandra Švaljek’s financial disclosure report suggests that she inherited the bonds)

“There is no such legal limitation which would state that a member of the HNB Council is not allowed to be a holder of bonds, that is, of debt securities of a legal entity which is under HNB’s supervision or to which HNB issues business permits,” it is said in HNB’s explanation.

Regulators are allowed to trade in bank bonds only in Croatia

HNB states the difference between bank stocks and bonds because, according to them, it is perfectly legal to trade in bonds. But not in stocks. How come?

By definition, bonds and stocks are securities; a bond is a debt security, and a stock is an equity security. The bond holder, within a specified period, has the right to the repayment of a certain amount of principal and corresponding interest. So Švaljek bought Erste Bank’s bonds in 2012, while she was a member of the HNB Council, and in 2017 she cashed them in.

The HNB Law prohibits only the trade in bank stocks, i.e. shares, and it only prohibits bank officials from participating in it. But the European Central Bank prohibits all employees from trading in any kind of bank securities. Both stocks and bonds. More precisely, the European Central Bank employees cannot have stocks, bonds, the right to buy or sell them, or any other kind of securities in the broadest sense of the term, including agreements on subscription, acquisition or disposal of such securities.

Employees are not allowed to trade in any kind of securities of the financial institution they supervise

Moreover, the European Central Bank’s rule is also the rule in almost all central banks in orderly countries.

For example, the employees of central banks of the eurozone, the UK and Sweden are allowed to trade in other securities by permission, but they are strictly prohibited from trading in securities of the financial institutions they supervise. On the other hand, the employees of the Bank of Japan are not allowed to trade in any kind of securities. let alone bank securities.

(The list and types of reports, Article 4:

For supervision purposes, the HNB collects the following reports:
Report on credit risk exposure by risk categories (RS4)
Report on past due receivables (DNP1)
Report on debtors with over 5 million kuna debts (D5M3)
Report on credit institution's shareholders and persons connected to them holding 3% or more shares (PD33)
Report on exposure to persons in a special relationship with a credit institution (POKI3)
Report on sold placements (PROP1)
Report on sold placements by placement buyers (PROPK)
Report on holdings in the capital of an undertaking (UKT5)
Report on tangible assets (MIKI4)
Report on acquired assets (PIKI2)
 Report on exposures to debtors (ID5)
Report on exposure to currency induced credit risk (VIKR3)
Report on the remaining maturity of assets and liabilities (ROC2)
Report on exposure to protection providers (IDZ2)
Trading book - daily balances (KD-TS)
Detailed trading book (DKT)
Report on the composition of a group of credit institutions in Croatia (S1)
Report on net short positions (IKP)
Change in the economic value of a credit institution's equity – contractual cash flows – fixed interest rate (EVK UNT FKS)
Change in the economic value of the credit institution’s capital - contractual cash flows - variable interest rates (EVK UNT PKS)
Change in the economic value of the credit institution’s capital - base case - fixed interest rates (EVK OS FKS)
Change in the economic value of a credit institution's equity – contractual cash flows – variable interest rate (EVK OS PKS)
Change in the economic value of a credit institution's equity – net discounted positions by scenario (EVK NDPS)
 Aggregated change in the economic value of a credit institution's equity (EVK ZBR)
 Impact of interest rate risk in the non-trading book on net interest income (NKP)
(2) For monitoring financing plans purposes, the HNB collects the following reports:
Assets (P 01.01)
Liabilities (P 01.02)

Documentation which banks need to provide to the HNB)

But this is Croatia, where it’s possible to get a public confirmation of an HNB official’s trade in bank securities along with the response that it complies with the law. The Croatian law.

She presented the bonds as inheritance

But let us return to Švaljek. At one point, she stated in her financial disclosure report that she owns Erste Bank’s bonds and that she acquired them through inheritance. But she did not. Švaljek claims that she inherited a large sum of money and immediately invested it through bank bonds.

“She had bought the bonds with resources inherited after the death of her father, and she stated ‘Inheritance’ as the manner of acquisition, because none of the other provided options better matched the acquisition manner of the source of resources for buying the mentioned bonds. Among other things, this means that Sandra Švaljek filled out her financial disclosure report properly and correctly,” HNB explains.

In her financial disclosure report Švaljek declared bonds worth 2.5 million kuna. The annual interest rate on bonds was 5.875 percent, and the bonds’ maturity date was in 5 years. The absolute return, i.e. the profit, amounted to  740.361,71 kuna.

The vice governor also in the bank bonds business

We should also mention the case of Davor Holjevac, who is currently a senior adviser in the Governor’s Office, and was the vice governor until 2012. According to the information from the Central Depository Agency (SKDD), he was extremely active on the securities market.

“According to his regular statements on the ownership of stocks and shares in the supervised and connected legal entities and audit firms, the HNB has no knowledge that Davor Holjevac owned stocks or equity interests in the legal entities under HNB supervision during the period when he was the vice governor of HNB. As claimed by Holjevac, he used inheritance money to buy an Erste Bank bond in 2009 and he kept it until maturity, i.e. the disbursement of the bond in 2014,” the HNB tells us.

The HNB is implementing the rule on prohibition of trade for its employees

Although we have confronted the HNB with the names of several employees who traded in bank securities, the bank says that there is no other legal basis on which they could conduct independent research or investigation. They also say that there is no legal option for them to access the Central Depository Agency information in order to verify the veracity of the information given by the mentioned employees.

“The mentioned legal provisions do not refer to other HNB employees, but they are also expected to refrain from trading in stocks and equity interests of banks the HNB supervises. We remind you that it is necessary to distinguish between stocks and equity interests and corporate bonds of banks: it is not against the law for any employee to possess corporate bonds of banks, including the governor, members of the Council or CEOs.

But this rule has changed, so HNB employees will not be allowed to trade in corporate bonds of banks founded in the EU or with branches in the EU, starting from March 1, 2022,” it is stated in the HNB’s response.

(Documents delivery deadlines, Article 9:

(1) A credit institution is required to submit reports to the Croatian National Bank within the following deadlines:
On a monthly basis, the data for the preparation of unaudited preliminary reports within 42 calendar days following the reporting month
On a quarterly basis, the data for the preparation of unaudited preliminary reports within 42 calendar days following the reporting quarter
Data for consolidated preliminary reports within 42 calendar days following the reporting date
Data for audited unconsolidated reports and audited consolidated reports within the time limit referred to in Article 163 of the Credit Institutions Act
Daily report at the latest by 15:30 on the following trading day
Report on the composition of a group of credit institutions by January 31 of the current year or within 30 days from the date of change in the composition and/or relationship within a group of credit institutions
Financing plans reports at the latest by March 15 of the current year
Financial statements within deadlines stated in Article 3 of the Commission Implementing Regulation (EU) 2021/451
(2) If the deadline for submission referred to in paragraph 1, items 1 to 3, 6, 7 and 8 of this Article falls on a Saturday, Sunday or a public holiday, the deadline for submission is changed to the first working day thereafter

Banks deliver information to the HNB on a daily basis)

Namely, as they say in the HNB, the bank founded the Business Compliance Office in 2019. Its task is to ensure integrity and the highest ethical standards, and the new Ethical Code was put into effect on October 6, 2020.

The HNB: We will improve our mechanisms

“In order to implement the ethical rules properly and consistently, it is necessary to supervise and monitor them using reliable mechanisms. The promotion of the employees actions compliance and the supervision of the implementation of the Ethical Code are the responsibilities of the Business Compliance Office. It represents the control function of the bank, which answers directly to the governor. The educational role is one of the main functions of the Office, in terms of promoting ethical principles, helping the employees to understand the principles of ethical responsibility, and in that way preventing potential unethical behavior in the future.

The basic rules contained in the Ethical Code concern conflict of interest, privileged information and the prohibition on receiving advantages,” states the HNB in its answer. They add that, by establishing close cooperation with the European Central Bank, the HNB has accepted the ECB guidelines on the ethical framework, and it will continue improving the supervision and mechanisms which ensure not only the HNB employees compliance with all legal provisions but also the compliance with the letter and spirit of the HNB Ethical Code and the ECB guidelines.

They have been a part of the European banking system since 2013, but they have not implemented the rule on trade ban

“Therefore we will, in accordance with legal possibilities, carry out additional analyses and make efforts in order to verify the statements in your letter, and we will act according to the results of those analyses, but also in order to improve, as much as possible, our internal control system,” the HNB concludes.

Finally, we should mention that the HNB has been a part of the European banking system since 2013. They have implemented almost all of its provisions, except the one on the prohibition of trade in bank securities. As we have mentioned above, they will do it as late as this year.

Originally published by Index Istrage (Index Investigations)