Recent Developments

On 8 March 2015, the Law ofUkraine "On Amendments to Certain Legislative Acts of Ukraine RegardingLiability of Bank-Related Persons" dated 2 March 2015 (the "LiabilityLaw") came into force. The purpose of the Liability Law is (i) tostrengthen the liability of bank-related persons (primarily managers andbeneficial owners of the banks) who make decisions that affect the financialpositions of banks, (ii) improve banking supervision and (iii) protect theinterests of depositors and creditors.

Implications for banks

The Liability Law imposes an obligation on the individual who owns a qualifyingholding in a bank (i) to notify the National Bank of Ukraine (the"NBU") within one month upon entry into force of the Liability Law aboutsuch holding, and (ii) to submit to the NBU all required documents within threemonths of the Liability Law entering into force.

Banks are also required to submit to the NBU the updated ownership structure ofthe banks within two months of the Liability Law entering into force. Inaddition, banks will have to submit to the NBU (i) information regardingpersons related to the banks, (ii) reports regarding transactions withbank-related persons and (iii) a calculation of credit risk ratios for transactionswith bank-related persons. 

What the law says

The List of Bank-RelatedPersons 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 thoseindividuals and/or legal entities through which such individuals carry outindirect ownership of a qualifying holding in a bank;

3. persons that have a qualifying holding in related or affiliatedentities of a bank;

4. executives, internal audit executive, committee head and committeemembers of banks and legal entities which are related or affiliated persons ofa bank;

In addition, the NBU is empowered to define within the course of bankingsupervision whether a person (individuals and legal entities) is related to abank. In this case, a bank has 15 days upon receiving the notice from the NBUto prove the opposite.

Contracts withBank-Related Persons Must Comply with Current Market Conditions

The Liability Law requires that an agreement with a person related to a bankmust be entered into based on current market conditions. If the terms of theagreement do not comply with this requirement, the agreement is deemed to bevoid. The list of transactions which are considered incompatible with currentmarket 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-relatedperson;

3. Investing in securities offered by a bank-related person provided thata bank would not make such investment in securities offered by any othercompany;

4. Selling property to a bank-related person at a value that is lower thanwhat the bank would receive from the sale of such property to another person;

5. Providing services to bank-related persons at interest rates and feesbelow current market conditions.

Furthermore, banks are not permitted to provide loans (i) to any person that isrequired 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 securitiesthat were placed or signed by a bank-related person. The NBU is authorized torestrict transactions of banks with bank-related persons.

Administrative andCriminal Liability of Bank-Related Persons

The Liability Law has strengthened administrative liability of bank-relatedpersons responsible for violating banking legislation and increased finesconsiderably. In addition, the Liability Law introduced liability underadministrative legislation for actions that result in recognizing a bank asproblematic.

The Liability Law establishescriminal liability of bank-related persons for driving a bank into insolvency.

Scope of Liability ofBank-Related Persons was Expanded

According to the Liability Law, a bank-related person whose actions oromissions result in damages to a bank is liable for such actions or omissionswith his/her property. If another bank-related person benefited directly orindirectly from actions or omissions of a bank-related person which causeddamages to a bank, such persons are jointly and severally liable for thedamages caused to a bank.

The NBU Resolution BecameEnforcement Document

The Liability Law stipulates that the resolution of the NBU to impose afinancial penalty on the bank shall have the force of the enforcement document,which is subject to compulsory enforcement. Therefore, the State ExecutionService of Ukraine is required to commence enforcement procedures based on suchresolution of the NBU.

Deposit Guarantee Fund MaySeek Redress of Damages Caused by Bank-Related Persons

The Deposit Guarantee Fund is authorized to seek redress of damages in courtfrom a bank-related person whose actions or omission caused damages to a bankand from a bank-related person who directly or indirectly benefited from suchactions or omissions.

Conclusion

The Liability Law was adopted in response to violations ofbanking legislation by bank-related persons. It is expected to strengthen theadministrative, criminal and civil liability of bank-related persons, as wellas to improve banking supervision and protect the interests of creditors anddepositors.
If you would like to discuss any aspect of the new measures please feel free tocontact us.

Additional notes

ThisLEGAL ALERT is issued to inform Baker & McKenzie clients and otherinterested parties of legal developments that may affect or otherwise be ofinterest to them. The comments above do not constitute legal or other adviceand should not be regarded as a substitute for specific advice in individualcases.