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Exchange Offices Are Mushrooming and Encourage Fraud. How is the NBU Reacting?


Oleksandr Vygovskyy, attorney at Ilyashev & Partners Law Firm
Source: Ekonomichna Pravda

According to statistics the number of foreign currency exchange offices in Ukraine is constantly growing regardless of the NBU’s strict requirements towards them.

At the same time the volumes of financial frauds and fraudulent activities are constantly growing and the banking regulator is reluctant to weed this problem out.

Ukrainian laws stipulate for the responsibility for unlawful purchase, sale, exchange or use of the foreign currency assets as of the means of payment or mortgage, i.e. performance of such actions without the licenses.

Pursuant to the Article 162 of the Code of Ukraine on administrative violations the mentioned activities result in issuing a warning or imposing a fine in the amount from 30 to 40 non-taxable minimum incomes of citizens with confiscation of foreign currency assets. In other words the most severe punishment which a guilty party may face is the fine in the amount from UAH 510 to UAH 748 with confiscation of foreign currency assets.

It is self understood that such “strict” measures will unlikely scare the swindlers who operate hundreds of thousands of hryvnias a day. Severity of the responsibility for violations at the foreign currency market (right up to introduction of criminal sanctions) and improvement of the control measures by the law-enforcement agencies for committing unlawful foreign currency operations would have a positive effect in the context of protection of currency market from manipulations.

The draft law “On currency regulation and currency control”, which is currently under the consideration of the Ukrainian Parliament, takes much more radical approach towards the problem.

Pursuant to the Article 9(2) of this draft law purchase and sale of the foreign currency at the territory of Ukraine by the resident and non-residents is carried out only via the authorized banks, i.e. via the banks holding a general license of the NBU for the right to carry out foreign currency operations in Ukraine.

The draft law stipulates for the punishment in the form of a fine in the amount of 25% from the sum of foreign currency operations for violation of the procedure of their execution.

However, it is not possible to fully protect the currency market only by administrative measures. There are several reasons why the services of illegal currency market are sought after even after abolition of the pension dues. Among them are the regulatory limitations on the amount of the foreign currency sum allowed for sale (not more than the equivalent of UAH 12 000), shortage of supply of foreign currency artificially created as a result of administrative measures, as well as instability of foreign currency exchange rate forcing people to use foreign currency as a method to save their money.

As a result the black market is a win-win for everybody including the banks and legally working exchange offices which also make good profits from it.

It may be assumed that such market in its current volumes (which exceed the volumes of the official foreign currency market tenfold) will exist until the moment when exist the restriction measures regarding the foreign currency operations which the NBU has been extending in the course of almost three years.

Strengthening of measures concerning the currency exchange offices, for example, adding demands towards transparency of the structure of property of the non-banking institutions without lifting restrictions on exchange of foreign currency will not bring the positive result and will only contribute to further withdrawal of the currency market into shade.

It needs to be acknowledged that in the course of a three-year period the regulator has implemented no effective measures directed at fighting foreign currency exchange “black” market.

In addition it must be remembered that regardless of whatever measures the State uses to protect the foreign currency market it will not be able to fully protect private investors from the risk to fall prey to fraudsters if the investors are not interested in it themselves and do not take due and reasonable care.

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