9 April 2015
Legal Alert: New Law on Responsibility of Banks’s Related Parties

Effective as of 8 March 2015, the new Law of Ukraine “On Introduction of Changes to Legislation of Ukraine relating to Responsibility of the Bank’s Related Parties” (the “Related Parties Law”) came into effect. The Related Parties Law is aimed at enhancing and extending the responsibility of Ukrainian banks’ related parties under the banks’ liabilities and thereby improving stability of the banking system in Ukraine.

Related Parties. The Related Parties Law extended the list of person to be recognised as related parties of a Ukrainian bank. In particular, such list includes:

  • direct and indirect owners of the bank holding at least 10% of shares (majority shareholders) in such bank, together with the entities through which such ownership exists;
  • management of the bank, including members of the supervisory board, management board, CFO and his/her deputies, heads of audit service and other separate divisions, heads and members of the bank’s committees;
  • controllers of the bank, being individuals or legal entities which have a decisive influence on the bank, either via direct/indirect ownership of 50% or more shares/voting rights in the bank or via any other means of control, such as a contract with the bank;
  • affiliated persons, including entities-participants in the respective banking group and majority shareholders of such persons;
  • affiliates of any individuals falling under any of the above items as well as legal entities where any such individuals hold management positions or own a majority stake; and
  • any person via which transactions are made in the interests of the abovementioned persons and which is under influence within such transaction.

The Ukrainian banks are required to submit to the National Bank of Ukraine (NBU) the list of all related parties. In particular, the Related parties Law requires that banks provide the NBU with updated information on their respective related parties, transactions with such parties and ownership structure generally. Further, shareholders of Ukrainian banks which are now deemed to be the majority shareholders shall notify the NBU accordingly and submit the documents required by Ukrainian regulations for the purposes of NBU’s approval of acquisition by such shareholder of a majority stake in the relevant Ukrainian bank.

In addition to the above, the NBU, while exercising its supervisory and controlling functions over the bank, may, by its own decision, designate any party as a related party to such bank to the extent any such party falls under any of the above criteria. Given that the above definition of related parties is deemed quite broad capturing a great number of persons related to the bank, this gives to the NBU rather wide authorities in extending the list of related parties of any bank and making transactions with such parties subject to restrictive related parties transactions’ rules.

Related Party Transactions. The Ukrainian bank’s transactions with its related parties shall not envisage any terms and conditions that are nonmarket. In particular, nonmarket conditions include acceptance of lower quality security interests (or less security interest) as compared to other arm’s-lengths secured transactions; purchase of products of a lower quality or at higher prices or in such circumstances where no such purchase would have ever been made by the bank; investment into securities of a related party which would not have been made had such investment been into any other entity; sale of any property to a related party at lower prices, provision of banking services at lower interest rates, fees or commissions payable by a related party; higher interest rate deposits attracted from related parties etc. The Related Parties Law has also introduces the rule pursuant to which any nonmarket transaction of a bank with its related party shall be deemed invalid from the date of its execution.

Related Parties Responsibility. The Related Parties Law provides for the rule pursuant to which a related party violating the law of Ukraine, including this law, and performing risky operations posing threat to interests of depositors/creditors of the respective bank or driving the bank into insolvency shall be subject to civil, administrative and criminal liability. The related party whose actions (or failure to act) resulted in losses of the bank shall be liable for this by its assets. A related party receiving benefit from any related party transactions, being loss-making for the bank, shall be jointly responsible for the bank’s losses together with any other related party participated in such transaction.

NBU shall exercise control functions over banks’ transactions with their related parties and may establish additional restrictions on operations of such banks with their related parties on case-by-case basis.

The Related Party Law also introduces a number of other novelties, such as extension of banking group definition, introduction of key participant definition and certain other definitions aimed at detailing and clarifying rules on the bank’s ownership structure reporting and control. In addition, the Related Party Law introduces changes to certain other Ukrainian legislations, such as Criminal Code of Ukraine, Code of Administrative Violations etc.

In particular, the Related Party Law has now specifically criminalized deliberate rendering of a bank insolvent (a hard-to-prove crime) by a related party unless such related party is a foreign national not residing in Ukraine and the respective crime has been committed outside of Ukraine. Such crimes are to be investigated by the Ukrainian fiscal authorities. The relevant provisions, which have been enacted by the Related Party Law, shall apply only to the crimes committed after its entry into force. At the same time, this does not cancel out the possibility for respective actions to be treated as other crimes, which were envisaged by the Ukrainian law yet before the Related Party Law became effective.

Administrative responsibility for violation of the banking regulations has also been toughened and it now extends to all related parties. Moreover, fines imposed by the NBU are now directly enforceable by the Ukrainian State Enforcement Agency (SEA) and no longer require prior litigation. NBU’s decisions imposing such fines can be submitted to the SEA even if they contain information, which is subject to bank secrecy, and such information may be further disclosed to the entities and individuals that get engaged into the relevant enforcement proceeding. In addition, the NBU is now expressly authorized to share certain information about the banks and their related parties, which is subject to bank secrecy, with the investigating authorities.