Ukraine: New Banking Regulations: Transparent Shareholding Structure And Enhanced Liability Of Related Persons

On 8 March 2015, the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Regarding Responsibility of Persons Related to a Bank" (the Law) came into effect.

The National Bank of Ukraine (the NBU) presented the Law as a first step in fighting non-transparent ownership structure of many Ukrainian banks and unfair use of related persons by bank owners. Among other things, the Law touches upon the following issues:

  • Related persons of a bank. The law expands the list of persons related to a bank. From now on, this list includes all persons (both natural persons and legal entities) in the chain of ownership of the bank's shares. In particular, controllers of a bank and intermediaries through which significant interest in a bank (10% or more of the bank's shares) is held were added to the list. Moreover, any persons through which operations in the interests of related parties are performed and which may be influenced by related parties during such operations are recognized as related parties. The NBU is authorized to determine whether a person mentioned in the new list is related to a bank and to notify the bank of such decision. Such person will be deemed related to the bank unless the bank proves the opposite to the NBU within 15 days from receipt of such notice from the regulator.
  • Transactions with related persons. The Law sets out new rules and restrictions on transactions with related persons. For example, the Law prohibits indirect credit operations with related persons and establishes that all transactions with related persons made on the terms other than current market terms are void ab initio. It is not yet clear whether the NBU will try to apply the respective provisions of the Law to loans granted before 8 March 2015 that remain outstanding and other similar transactions that have not been fully performed.
  • Liability of related persons. The Law expands civil, administrative and criminal liability of persons related to a bank.

    • Administrative and criminal liability. If actions of a related person led to designation of a bank as a problematic one, such person may be subject to a fine of up to UAH 170,000. Actions of related persons that led to insolvency of a bank and, consequently, caused significant damages to the state or the bank's creditors, may result in criminal liability.
    • Civil liability. A related person that caused damages to a bank by its actions or omission shall be liable for such damages with its property. If damages were caused by actions of a related person and another related person received direct or indirect benefit from it, such related persons are liable jointly and severally. This wording in the Law creates liability risks not only for the direct counterparties of the bank, but also for the bank owners and other related persons. We expect large corporate groups that are affiliated with Ukrainian banks to audit all of their dealings with such banks and mitigate any identified risks, possibly through the restructuring of the group.

      The Law also prescribes that if the estimated value of the bank's liquidation estate is insufficient to cover the accepted creditors' claims, the Depositor Insurance Fund may demand the related persons that have caused damages to the bank or received direct or indirect benefit from it to compensate damages caused to the bank. The above amendments are, in the NBU's opinion, supposed to deprive the bank owners of possibility to abuse justice by using classic civil law protections against claims for compensation of damages.
  • Disclosure of a bank's ownership structure. The Law introduces new requirements regarding disclosure of the banks' ownership structure. It requires banks to disclose "key stakeholders" (defined as any person holding 2 per cent or more of shares in a legal entity) in their ownership chain. The new disclosure standard aims at increasing the transparency of the bank's ownership structure by exposing the links to the bank's ultimate beneficial owner, whether an individual or a foreign public listed company.
  • Acquisition of indirect significant interest in a bank. The Law establishes a new approach to obtaining approval for acquisition of significant interest in a bank. The criterion of control used previously required an indirect owner to obtain NBU approval for acquisition of significant interest in a bank only if such owner acquired control (for example, by acquiring 50% or more of shares) over the bank's direct shareholder. In other words, if a person acquired 30% of shares in a direct owner of 100% of the bank's shares, such person was not considered to be an acquirer of indirect significant interest, as it did not control the direct owner. The Law changes the approach establishing that an indirect owner has significant interest in a bank irrespective of control over the direct owner of the bank or any person in the chain of ownership of the bank's corporate rights. We expect the NBU to publish amendments to its regulations and to settle the issues related to the implementation of the Law soon. Most likely, the NBU will use a formula for the calculation of indirect significant ownership in a bank similar to those used by other regulators in the financial and securities sectors. Under such formula, the acquirer of 30% shareholding in the direct owner of the bank will indirectly acquire 30% of the bank and will be recognized as an indirect owner of significant interest in a bank. Such acquirer will have to obtain NBU approval. On the other hand, acquisition of 30% shareholding in a company owning 30% of the bank's shares will not exceed the threshold of significant interest.

All shareholders who fall under the definition of indirect owners of significant interest in a bank under the new rules will have 3 months to submit documents to obtain the NBU approval.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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