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

RelatedParties. The Related Parties Law extended the list of personto be recognised as related parties of a Ukrainian bank. In particular, suchlist includes:

           direct andindirect owners of the bank holding at least 10% of shares (majorityshareholders) in such bank, together with the entities through which suchownership exists;

           management of thebank, including members of the supervisory board, management board, CFO andhis/her deputies, heads of audit service and other separate divisions, headsand members of the bank’s committees;

           controllers ofthe bank, being individuals or legal entities which have a decisive influenceon the bank, either via direct/indirect ownership of 50% or more shares/votingrights in the bank or via any other means of control, such as a contract withthe bank;

           affiliatedpersons, including entities-participants in the respective banking group andmajority shareholders of such persons;

           affiliates of anyindividuals falling under any of the above items as well as legal entitieswhere any such individuals hold management positions or own a majority stake;and

           any person viawhich transactions are made in the interests of the abovementioned persons andwhich is under influence within such transaction.

TheUkrainian banks are required to submit to the National Bank of Ukraine (NBU)the list of all related parties. In particular, the Related parties Lawrequires that banks provide the NBU with updated information on theirrespective related parties, transactions with such parties and ownershipstructure generally. Further, shareholders of Ukrainian banks which are nowdeemed to be the majority shareholders shall notify the NBU accordingly andsubmit the documents required by Ukrainian regulations for the purposes ofNBU’s approval of acquisition by such shareholder of a majority stake in therelevant Ukrainian bank.

Inaddition to the above, the NBU, while exercising its supervisory andcontrolling functions over the bank, may, by its own decision, designate anyparty as a related party to such bank to the extent any such party falls underany of the above criteria. Given that the above definition of related partiesis 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 relatedparties of any bank and making transactions with such parties subject torestrictive related parties transactions’ rules.

RelatedParty Transactions. The Ukrainian bank’stransactions with its related parties shall not envisage any terms andconditions that are nonmarket. In particular, nonmarket conditions includeacceptance of lower quality security interests (or less security interest) ascompared to other arm’s-lengths secured transactions; purchase of products of alower quality or at higher prices or in such circumstances where no suchpurchase would have ever been made by the bank; investment into securities of arelated party which would not have been made had such investment been into anyother entity; sale of any property to a related party at lower prices,provision of banking services at lower interest rates, fees or commissionspayable by a related party; higher interest rate deposits attracted fromrelated parties etc. The Related Parties Law has also introduces the rulepursuant to which any nonmarket transaction of a bank with its related partyshall be deemed invalid from the date of its execution.

RelatedParties Responsibility. The Related PartiesLaw provides for the rule pursuant to which a related party violating the lawof Ukraine, including this law, and performing risky operations posing threatto interests of depositors/creditors of the respective bank or driving the bankinto insolvency shall be subject to civil, administrative and criminalliability. The related party whose actions (or failure to act) resulted inlosses of the bank shall be liable for this by its assets. A related partyreceiving benefit from any related party transactions, being loss-making forthe bank, shall be jointly responsible for the bank’s losses together with anyother related party participated in such transaction.

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

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

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

Administrative responsibility forviolation of the banking regulations has also been toughened and it now extendsto all related parties. Moreover, fines imposed by the NBU are now directlyenforceable by the Ukrainian State Enforcement Agency (SEA) and no longerrequire prior litigation. NBU’s decisions imposing such fines can be submittedto the SEA even if they contain information, which is subject to bank secrecy,and such information may be further disclosed to the entities and individualsthat get engaged into the relevant enforcement proceeding. In addition, the NBUis now expressly authorized to share certain information about the banks andtheir related parties, which is subject to bank secrecy, with the investigatingauthorities.

About EPAP Ukraine

Egorov Puginsky Afanasiev & Partners Ukraine (EPAP Ukraine) isone of the leading full-service law firm in Ukraine, advising leading globaland local businesses in Ukraine, throughout the CIS and worldwide.

In 2014, the firm has been recognized as a leader of the Europeanmarket according to The Lawyer European Awards 2014: European Law Firm ofthe Year and European Corporate Team of the Year.

Mediacontacts                  

Alyona Onishchenko

Tel.: +380 44 492 82 82  

a.onishchenko@epap.ua