Driving a Bank to Insolvency: The Forensic Expert's Role (218-1)

When the National Bank of Ukraine (NBU) classifies a bank as insolvent, the investigation faces one central question: is this the consequence of deliberate acts by persons connected to the bank, or of ordinary market risk that no financial business is immune to? The answer does not come from emotion or from a press headline. It comes from forensic economic expertise, which puts the amount of damage into figures and demonstrates the causal link between specific transactions and the loss of solvency. Below I explain how this works under Article 218-1 of the Criminal Code of Ukraine (KK) and what each side of the proceedings should be looking at.

What Article 218-1 establishes and who the subject is

Article 218-1 KK is titled “Driving a bank to insolvency.” Its provision covers the deliberate commission — out of self-interest, other personal interest, or in the interests of third parties — of acts that caused the bank to be classified as insolvent, where this inflicted large material damage on the state or on creditors. The threshold for “large damage” is set in the note to the article as a multiple of a statutory indicator; the specific sum in each case is calculated separately, and that is already the expert’s task.

The defining feature of this offence is its special subject. It is not just any person, but a person connected to the bank. The relevant list is set out in the specialized Law “On Banks and Banking Activity”: the bank’s officers, members of the management board and the supervisory board, holders of qualifying holdings, persons who exercise control over the bank, and legal entities connected to them. In practice this means the charge is addressed to those who held real levers of influence over the bank’s decisions, not to rank-and-file employees.

Such crimes are usually investigated by the Bureau of Economic Security (BEB), often in cooperation with the National Bank and the Deposit Guarantee Fund. Materials showing signs of money laundering may be examined in parallel by financial-monitoring bodies, in particular the State Financial Monitoring Service (Derzhfinmonitoring).

How a bank is classified as insolvent

The legal “point of no return” is fixed not by the court and not by the expert, but by the National Bank of Ukraine. Acting on its prudential ratios and supervision results, the NBU adopts the decision to classify a bank as insolvent. After that, the function of withdrawing the bank from the market passes to the Deposit Guarantee Fund for Individuals (DGF), which acts under the Law “On the Household Deposit Guarantee System.” The Fund introduces a temporary administration, pays out to depositors within the guaranteed amount, and carries out the liquidation.

For the expert examination this matters for two reasons. First, the NBU decision and the DGF documents become objective reference points in time. Second, the very body of data gathered during the temporary administration and liquidation — the register of accepted creditor claims, asset valuations, financial-condition reports — forms the evidentiary base for calculating the damage.

Indicators that draw the expert’s attention

In practice, insolvency is almost never caused by a single “fatal” payment. It is a system of transactions that gradually drained the capital. The most typical indicators are:

• Insider lending — extending loans to persons connected to the bank on non-market terms, exceeding the limits the NBU sets for transactions with related parties.
• Loans to “shell” companies — borrowers without genuine business activity, with artificial turnover, created to siphon out liquidity. Funds often move “in a circle” and return to connected structures.
• Unreliable collateral valuation — overstating the value of security, accepting illiquid or encumbered assets as collateral, which masks the real credit risk.
• Understated provisions — under-provisioning (in current methodology, understating the assessment of credit risk on active operations) to artificially hold capital indicators within the norm and delay the regulator’s response.

Each of these indicators leaves its own documentary trail — and it is the documents, not assumptions, that form the basis of the opinion.

What exactly the forensic economist calculates

Expertise in such cases belongs to economic expertise, and specifically to the examination of documents on financial and credit operations (specialty 11.3). It is ordered under the rules of the Criminal Procedure Code (KPK), the Law “On Forensic Expert Activity,” and the Ministry of Justice Instruction on ordering and conducting forensic examinations (order No. 53/5). Two key blocks of questions are put to the expert.

First — the amount of damage. The expert determines:

1. The bank’s losses from specific credit and other operations (unrecovered loans, the difference between the book value and the real value of assets).
2. The amount of under-formed provisions and its effect on regulatory capital.
3. The damage to creditors — in particular through the register of claims accepted by the Fund and the actual level to which they were satisfied.

Second — the causal link. This is the hardest part. It is not enough to show that the bank suffered losses. One must prove that it was precisely the transactions under review (and not the general market situation) that caused the loss of solvency. To do this, the expert reconstructs, step by step: what the state of capital was before the operations, how each operation affected the ratios, at what moment the indicators went beyond the permissible limit, and whether that coincides with the decisions of specific individuals.

Documents without which no opinion is possible

The quality of the examination depends directly on the completeness of the materials provided. The minimum set:

• credit files (borrower dossiers) — applications, disbursement decisions, monitoring of debt servicing;
• minutes and decisions of the credit committee — these show who approved the operations and on what grounds;
• the bank’s reporting to the NBU — forms, ratio calculations, data on capital and provisions;
• DGF data — the register of creditor claims, asset valuations, temporary-administration reports;
• collateral valuation reports, security agreements, and bank statements showing the movement of funds.

The table below links “indicator — source — subject of examination.”

Indicator	Data source	What the expert establishes
Insider lending	Credit files, list of related parties, credit-committee minutes	Volume and terms of loans to related parties, compliance with NBU limits
Loans to “shell” companies	Credit dossiers, borrowers’ financials, bank statements	Signs of absent real activity, “circular” movement of funds
Unreliable collateral valuation	Valuation reports, pledge agreements, registry data	Overstatement of value and the real liquidity of the security
Understated provisions	Provision/credit-risk calculations, asset classification, NBU reporting	Amount of under-formed provisions and impact on capital

NBU prudential ratios as a baseline

To assess whether a bank’s condition was “normal,” the expert relies on the regulator’s prudential requirements. Two anchor points:

• Regulatory capital adequacy (ratio N2) — shows whether own capital is sufficient to cover risks. When the indicator approaches its limit, or breaches it, that is a signal the bank is moving toward insolvency.
• Provisioning for active operations / credit-risk assessment — under the current NBU regulation on determining the size of credit risk for active banking operations. Under-provisioning inflates capital “on paper” and postpones the regulator’s reaction.

These ratios give the expert an objective scale: not “it seems risky,” but “as of such-and-such date the ratio was breached by such-and-such a margin as a result of such-and-such operations.”

A common mistake: market losses ≠ deliberate insolvency

The most widespread error — in both prosecution and defence positions — is to equate any loss a bank suffers with deliberately driving it to insolvency. Banking is risky by definition: devaluation, a crisis, or the default of a large borrower can inflict significant losses without any criminal intent. Article 218-1 does not punish unsuccessful decisions; it punishes deliberate acts by a connected person in personal or someone else’s interest.

That is why it is critical for the expert opinion to distinguish:

• losses from objective market and macroeconomic factors;
• losses from management decisions that went beyond reasonable business risk and bore the hallmarks of asset stripping.

The forensic economist does not establish intent — that is the competence of the investigation and the court. But the expert provides the instrument that shows whether the losses are consistent with the logic of normal banking activity, or whether they have a systemic, directed character.

What the parties should watch for

• For investigators and detectives: frame questions to the expert more precisely and ensure the completeness of documents. Missing credit files or credit-committee minutes make the causal-link calculation vulnerable.
• For the defence: check whether the expert separated market losses from “man-made” ones, whether the valuation date for the ratios was chosen correctly, and whether the opinion rests on assumptions rather than primary documents.
• For bank and financial-institution executives and owners: keep the justifications for credit decisions, the collateral valuations, and the provision calculations. It is precisely these documents that later attest to good faith — or its absence.

Cases under Article 218-1 sit at the intersection of law, banking supervision, and economic analysis, and here the cost of an error in the calculation is too high. If you face such a situation — as a party to the proceedings or as an executive who wants to assess the risks in advance — reach out for a consultation or to commission a forensic economic examination: we will work through the documents and build a position on figures, not on assumptions.