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Non-Bank Depositors’ Situational Protection


Oleksandr Vygovskyy, attorney at Ilyashev & Partners Law Firm
Source: Dzerkalo Tyzhnia

A controversial Law “On Amendment of Certain Laws Regarding the Reimbursement to Individuals via Deposit Guarantee System for Damages caused by the Abuse in the Field of Banking and other Financial Services” took effect of November 19, 2016.

This law was adopted directly to resolve the issues with “Mykhaylivsky” Bank depositors. It equals to bank deposits the private deposits in the form of loans or deposits to non-bank financial institutions through the bank, which acted as an attorney under the corresponding agreement. In addition, the law equals the individuals allocating such funds to the depositors with all relevant rights including the right to obtain the guaranteed reimbursement of deposits in the amount up to 200 thousand UAH. Pursuant to the adopted law, Individual Deposit Guarantee Fund (IDGF) is obliged by December 16, 2016, to initiate the reimbursements to individuals, who became liable to such reimbursement due to granting the depositors’ status to them.

When reading this law, the first thing catching an eye is that the specified equity of rights shall apply only to the clients of “Mykhaylivsky” Bank, who deposited their funds not at the bank directly, but at the number of companies related to this bank, such as “Credit and Investment Center” and “Investment Calculation Center”, at the time when the bank acted only as an intermediary. It was extremely favorable for depositors to conclude such agreements: much higher percentage was calculated for such funs as compared to funds directly deposited to “Mykhaylivsky” Bank. Nevertheless, such investments were highly risky, as they did not fall under the Law “On Individual Deposits Guarantee System”, which meant no guarantee for the reimbursement of these funds in the secured amount. And now on these individuals, consciously or unwittingly accepting the increased investment risks in exchange for high profits shall be equated in rights with their more prudent fellow citizens. At the same time, the law’s provisions are formulated in such a way that it will be impossible to apply it to similar situations in the future.

First of all, the law directly prohibits the banks to carry out the transactions by raising the individuals deposits without reflecting them bank’s assets and liabilities (that particularly was done by “Mykhaylivsky” Bank), and prohibits financial institutions to raise individuals deposits (except their participants) in cases directly not envisaged by the law on the activities of the corresponding financial institution. In such a manner the law’s authors tried to stem such manipulations in the future, so that the banks would not be tempted to conceal the violation of economic standards and to mislead the regulator. Secondly, as directly appears from the law, its provision on equaling the funds at non-bank financial institutions to deposits relates only to those funds, which had been raised through the intermediary of the bank classified as insolvent at the date of this law enforcement. In such a way, even if any other bank has also successfully implemented such scheme it is clear that its clients shall have poor chances to receive the guaranteed reimbursement of their deposits from IDGF.

Therefore, we may conclude that this law did not bring any significant changes for banking and financial system of Ukraine. There are no reasons to proclaim it as “law protecting the interests of deceived depositors”, as it protects only those who due their active participation in the protests achieved the relevant concessions. Extension of the scope of individual deposit guarantee system carries purely situational character (no wonder that the law’s provision on equaling the funds at non-bank financial institutions to deposits is included into the Section “Final and Transitional Provisions” of the Law “On Individual Deposits Guarantee System”). This law practically does not solve any problems of other financial institutions’ clients, whose interests are totally unprotected by deposits guarantee system. After all, we are approaching the times when not only the deceived bank depositors will picket the regulator, but also the clients of bankrupt insurance companies: current legislation does not provide any guarantees to them, and the draft law on the establishment of insurance payments reimbursement fund has never got off the ground.

A positive side of this law is the strengthening of liability of persons related to the bank (in other words persons controlling or managing it), who participated in forcing the bank into insolvency. As of now IDGF, in case the bank’s property is insufficient to cover of payments, shall have the right to apply to the related person, whose actions or inactions caused damages to the creditors or to the bank, with the request to reimburse such damages. Assets collected from bank related persons shall be included into the liquidation mass. Failure to fulfill the Fund’s requirements shall enable the Fund to file a lawsuit against the bank related person with further issuance of a freezing order. At the same time, the liquidation of insolvent bank does not form the basis for the suspension of court proceedings based on the Fund’s petition, as well as it does not imply the release from liability of related to the bank person who caused damages to the bank. Therefore, the Fund’s theoretical chances to be reimbursed by the related to the bank person are quite high given that this person will be proved guilty of causing damages to the bank and its creditors, and if his assets have not been transferred abroad in advance. Nevertheless, as the situation with “Mykhaylivsky” Bank shows, the success of such measures implementation may be quite moderate. It is well-known that IDGF reported four crimes to law enforcement authorities. These crimes were allegedly committed by “Mykhaylivsky” Bank owners (top-managers) and officials for the amount of 5.2 billion UAH. There have been 435 claims filed against all shareholders and top-managers for the total amount of 192.2 billion, but the damages caused to the bank and its depositors have not been recovered.

Due to the latest avalanche-like bankruptcy of banks and other financial institutions, it has long been needed to legally envisage the liability of financial regulators — National Bank and National Commission for Financial Markets Regulation — for their inaction during control and monitoring. It is hard to believe that NBU employees had no clue on what was going on in “Mykhaylivsky” Bank and what schemes were used by its executives to build another financial pyramid. Upgrading the penalty for the regulator and its officials shall increase the efficiency of bank regulation and control, and shall make the regulator’s reaction to law infringements more rapid.

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