WAYS TO PREVENT ASSET WITHDRAWAL FROM BANKS
Nickolas Likhachov, Counsel at Spenser & Kauffmann, Attorneys at Law, specially for the Forbes
According to the National Bank, over 30 banks have been liquidated in Ukraine as of today. About 80 more banks are in liquidation. Nobody holds out hope that these are the last bankruptcies, although the Chairperson of the NBU, Valeriya Hontaryeva, declared back in December 2015 that the regulator had succeeded in successfully completing the transaction of removing from the market the highly speculative insolvent financial structures through which funds were withdrawn from the economy. “We are confident that the worst is already behind us and we are full of reserved optimism for the future”, she said then. Nine months of 2016 have already elapsed but banks still continue going bankrupt and money keep being successfully moved out of the country.
No operational actions are, however, being taken against the management of the troubled banks. Nowadays, one cannot remember any single case when guilty persons have been punished and stolen funds have been returned to Ukraine. An exception (although with a great reserve) is the situation around Bank Mykhailivsky. According to the available information, the bank’s management is now being held in a pre-trial detention centre and an operational work is being carried out in the case. As to all the rest banks, no member of their management boards and no beneficial owner has ever been placed under investigation for over two years of the financial market crisis.
Still, the case with Bank Mykhailivsky has proved that investigative officers in Ukraine know how to conduct the investigative work – even if such work is demonstrative. They can do the work if they want to. The problem is, however, that there is simply absolutely no work being conducted in all the rest cases. For some reason, investigation authorities tend to encounter resistance where, logically, they should be given the “green light’” Employees of state authorities are unwilling to testify or provide any useful information and courts do not bring the case to a final adjudication. All of the above things suggest that the withdrawal of funds from banks is done with the participation of public officials, especially where the matter concerns the withdrawal of huge sums.
Still, even in such conditions the withdrawals can be prevented. First of all, the NBU should develop a well-tuned refinancing system applicable to troubled banks. One can remember that, back at the height of this process, the National Bank very often provided refinancing secured by personal sureties and guarantees from banks’ beneficiaries who are now actually hiding. It looks like, banal as it might seem, the National Bank neither had a mechanism to inspect financial institutions to which the funds were disbursed nor exercised control over the use of such funds. This is because of the nature of the refinancing. The fact is that the refinancing is a kind of a loan granted to a bank by the regulator to increase the bank’s liquidity. And it is very bad when the National Bank further exercises no control over the use of such assets, over where such capital is being removed and to what correspondent account it is being transferred.
The situation with control by the NBU could most certainly be improved by a curatorship institution. The point is to carry out a more in-depth analysis of the operations of banks that have come under suspicion. Just think what is going on right now. Inspections of banks are often conducted improperly and not always opportunely. Furthermore, this is sometimes the case that the bank somehow manages to conceal and camouflage its shady dealings while the inspection is being conducted.
That is why the curatorship institution should be further developed. Curators should be highly professional and well-paid experts in banking and finance who will know better than the chief accountant and better than the chairperson of the board how the bank operates and what tricks it can use to conceal serious problems in its operations.
The chief executives willing to force the bank into bankruptcy and to remove funds from such bank will demonstrate the curator that the financial institution is performing well. However, who else if not the detective should identify that the seemingly legal transactions conceal a fraud.
So far, we have unfortunately never come upon the case where the curator succeeded in preventing something in a bank because the National Bank does not hire good experts for such positions. Notably, the NBU has available money to pay decent salaries to such experts.
Additionally, a dialogue seems to be expedient between the NBU and international institutions – donors which could proceed to partially finance salaries for at least a certain type of public officials that are important for the system and the economy as a whole, which would enable to preserve the Ukrainian banking system. This would disincline the curator to take bribes from the management of the bank the curator is supervising. Furthermore, this would step up the curator’s commitment to go to public service with the understanding that the salary the curator earns will be enough to decently support his or her family. It is actually all about this.
On top of that, Ukraine should give a serious thought to the global trend of deoffshorization and join the initiative of the Organisation for Economic Co-operation and Development regarding the automatic exchange of information for tax purposes. For the time being, a total of 101 countries and virtually all offshore jurisdictions have signed the respective convention. As to Ukraine, one cannot even be confident that the convention will be signed in the two or three years to come.
The global offshore market is, however, being closed down. It will be closed to Ukraine as well. Offshore structures will no longer be offshore in their traditional meaning. They will probably be used to properly structure international transactions using the English law and will never be used for money laundering and corruption schemes. Such step can only be welcomed.
And the main task which, if solved, will enable to prevent the outflow of assets from Ukraine is to minimize reasons for capital withdrawal from the country. Businesses do not find it advantageous to keep their funds in our country because of the economic downturn, which is, in particular, caused by military operations in eastern Ukraine. Money, however, likes a quiet place. For this reason, the issue of capital withdrawal cannot be approached from a single standpoint that it is only the actions of the National Bank that could remedy the situation. The regulator certainly has some drawbacks in its operations and such drawbacks should be eliminated and paid attention to. On the other hand, it is also important to stabilize the political and economic situation and optimize the tax system: to reduce the number of taxes, to lower tax rates, and to simplify tax payments.