On 8 March 2015, the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine Regarding Liability of Bank-Related Persons” dated 2 March 2015 (the “Liability Law”) came into force. The purpose of the Liability Law is (i) to strengthen the liability of bank-related persons (primarily managers and beneficial owners of the banks) who make decisions that affect the financial positions of banks, (ii) improve banking supervision and (iii) protect the interests of depositors and creditors.
Implications for banks
The Liability Law imposes an obligation on the individual who owns a qualifying holding in a bank (i) to notify the National Bank of Ukraine (the “NBU”) within one month upon entry into force of the Liability Law about such holding, and (ii) to submit to the NBU all required documents within three months of the Liability Law entering into force. Banks are also required to submit to the NBU the updated ownership structure of the banks within two months of the Liability Law entering into force. In addition, banks will have to submit to the NBU (i) information regarding persons related to the banks, (ii) reports regarding transactions with bank-related persons and (iii) a calculation of credit risk ratios for transactions with bank-related persons.
What the law says
The List of Bank-Related Persons was Expanded The Liability Law clarifies and expands the list of persons related to a bank. It now, inter alia, includes: 1. beneficial owners of a bank; 2. individuals that have a qualifying holding in a bank and those individuals and/or legal entities through which such individuals carry out indirect ownership of a qualifying holding in a bank; 3. persons that have a qualifying holding in related or affiliated entities of a bank; 4. executives, internal audit executive, committee head and committee members of banks and legal entities which are related or affiliated persons of a bank; In addition, the NBU is empowered to define within the course of banking supervision whether a person (individuals and legal entities) is related to a bank. In this case, a bank has 15 days upon receiving the notice from the NBU to prove the opposite. Contracts with Bank-Related Persons Must Comply with Current Market Conditions The Liability Law requires that an agreement with a person related to a bank must be entered into based on current market conditions. If the terms of the agreement do not comply with this requirement, the agreement is deemed to be void. The list of transactions which are considered incompatible with current market conditions includes, inter alia, the following: 1. Accepting less collateral than requested from other clients; 2. Purchasing low quality or overpriced property from a bank-related person; 3. Investing in securities offered by a bank-related person provided that a bank would not make such investment in securities offered by any other company; 4. Selling property to a bank-related person at a value that is lower than what the bank would receive from the sale of such property to another person; 5. Providing services to bank-related persons at interest rates and fees below current market conditions. Furthermore, banks are not permitted to provide loans (i) to any person that is required to redeem any obligation in favor of a bank-related person for (ii) purchase of assets of a bank-related person and (iii) purchase of securities that were placed or signed by a bank-related person. The NBU is authorized to restrict transactions of banks with bank-related persons. Administrative and Criminal Liability of Bank-Related Persons The Liability Law has strengthened administrative liability of bank-related persons responsible for violating banking legislation and increased fines considerably. In addition, the Liability Law introduced liability under administrative legislation for actions that result in recognizing a bank as problematic. The Liability Law establishes criminal liability of bank-related persons for driving a bank into insolvency. Scope of Liability of Bank-Related Persons was Expanded According to the Liability Law, a bank-related person whose actions or omissions result in damages to a bank is liable for such actions or omissions with his/her property. If another bank-related person benefited directly or indirectly from actions or omissions of a bank-related person which caused damages to a bank, such persons are jointly and severally liable for the damages caused to a bank. The NBU Resolution Became Enforcement Document The Liability Law stipulates that the resolution of the NBU to impose a financial penalty on the bank shall have the force of the enforcement document, which is subject to compulsory enforcement. Therefore, the State Execution Service of Ukraine is required to commence enforcement procedures based on such resolution of the NBU. Deposit Guarantee Fund May Seek Redress of Damages Caused by Bank-Related Persons The Deposit Guarantee Fund is authorized to seek redress of damages in court from a bank-related person whose actions or omission caused damages to a bank and from a bank-related person who directly or indirectly benefited from such actions or omissions.
The Liability Law was adopted in response to violations of banking legislation by bank-related persons. It is expected to strengthen the administrative, criminal and civil liability of bank-related persons, as well as to improve banking supervision and protect the interests of creditors and depositors.