Dealings with a bank’s related parties in Ukraine – shake up in search of confidence



As a part of the 2014 loan for reform in Ukraine package put forward by a consortium of development institutions led by the International Monetary Fund, the National Bank of Ukraine was mandated with reforming the banking system as well as the regulatory framework. One of the pillars of the reform was redefining transparency in the shareholding structure of banking institutions, including such aspects as: (i) disclosure of the owners (and controllers); (ii) screening reputation of owners, controllers, directors and officers; and (iii) control of dealings between the bank and its related parties.

Related parties

The law No.218-VIII dated 2 March 2015 provided, at the NBU’s initiative, painstakingly wide criteria of ‘related parties’ (poviazani osoby), restating Article 52 of the effective Act ‘On Banks and Banking’ to now include the following new types of relationships: (i) controllers of the bank (persons who own 50 or more percent of shares in the bank, or are by other means able to influence decisively the bank’s resolutions, and are not under control of other individuals; (ii) intermediaries (individuals) between the major stakeholders (individuals) and the bank; (iii) qualifying shareholders of the bank’s affiliates (affiliiovani osoby) and sister-companies (sporidneni osoby); (iv) officers and committee members of the bank’s affiliates and sister-companies, as well as officers of internal audit departments of such entities; (v) associated parties (i.e., members of the immediate family) of the bank’s controllers, sister-companies and of major stakeholders (individuals), affiliates and major stakeholders (individuals) of the directors and officers of internal audit departments and committee members of the bank’s affiliates and sister-companies; and (vi) intermediary companies (e.g., SPVs) or persons (e.g., employees) involved in operations for the benefit of any of the bank’s related persons.

The NBU has reinforced the law, with regulation No.315 dated 12 May 2015, arming itself and the banks with tools to define whether the party concerned is related. The NBU’s criteria for analysis, as stipulated in the regulation, include: economic dependence; exclusivity of relations with the bank; unusual interest rates, fees and other pricing for transactions, including quantity and quantity of security provided; shared infrastructure; lack of transparency around the bank’s ownership; the purpose and documentation of transactions; deviations from operational standards or internal control procedures; and overall debt, solvency, exposure and other financial ratios.

The NBU has a right to characterise a particular entity as related. This determination can be rebutted by the bank within 15 days, otherwise the bank will have to report such entity as related. As the latest changes to the law suggest, contesting determination in the court will not remove this obligation until a judgement to the contrary becomes final and binding.

Untangling ownership structure

The NBU overhauled the rules for disclosure and reporting of shareholders (key participants) with the purpose of keeping the general public aware of the bank’s main beneficiaries as well as collecting data for its own merger control and analysis of transactions with related parties.

The mere presence of a maze ownership structure would probably let the NBU loose on a bank. There would also be legal grounds for a check if a person or a company was unable to fend off any public rumours about their relationship with a bank. Opaque shareholding structures deprive banks of the benefits under provisional regulations that set loose capital ratio requirements during the crisis; such banks do not qualify for ‘last instance’ financing by the NBU. Both measures give rather wide discretion to NBU officers.

As of March 2015, each bank has to maintain a database and report with respect to many more people and legal entities. Such reporting must be kept up-to-date, within 10 days upon each change in the ownership structure and, in any event, annually.

Transactions with related persons must be on an arm’s length basis under the threat of being declared null and void – if not by the bank itself in court, then by the external administrator in the course of insolvency. Nevertheless, affiliated lender under the subordinated loan cannot charge interest more than 1/10th of the maximum, established by the NBU; moreover, the lender has to waive interest payments during the time when the borrowing bank is in crisis. Thus, any counterparty must be fraught of the subordinated loan and aware of a 12-month ‘hardening’ period for each transaction.

The regulator has also restated the methodology for exposure to related parties, which cannot exceed 25 percent of the regulatory capital. The final touch is prohibiting indirect loans to related parties.

Why take new measures in this area?

The top priorities are to restore the public’s confidence in the banking sector because of plummeting deposits and to address inaccurate reporting by publishing records in compliance with IFRS. Bank accountability and sustaining a system of fewer banks with a higher concentration of assets are other important drivers.

By implementing additional rules on related party transactions, Ukraine has moved a step closer to making its EU ambitions a reality. This involves general compliance principles stipulated in the EU-Ukraine Association Agreement and Basel II principles.

There are also some indirect benefits, such as fighting political corruption as well as unlawful business and power unions, imposing accountability on owners who milked out their banks for the benefit of other businesses and left taxpayers to pay the small depositors.

There have also been steps toward pressing the banking sector with a view to national security. The Law ‘On Sanctions’, adopted on 14 August 2014, provides for revoking the licences of entities involved in relations with the aggressor state. Thus, subsidiaries of Russian banks in Ukraine, particularly the government-controlled Sberbank, VEB and VTB, are in limbo.


The fines for failing to comply with the related-party rules have increased dramatically, in some cases 20-fold. Various violations of banking regulations (including non-disclosure of related parties, or providing inaccurate  information on them or on transactions with them) would now cost UAH 34,000 to 85,000 (about US$1600 to US$4000) in penalties alone. Fines for causing a bank’s status to become troubled are in the range of UAH 85,000 to 170,000 (about US$4000 to US$8500). For causing bankruptcy, restraint or imprisonment are possible in addition to the aforementioned fine.

Failure to duly disclose related parties may lead to recognition of a bank as troubled, denial of a general banking licence and rejection of a refinancing loan.

One of the biggest concerns for the Ukrainian banking market is the introduced related party liability for the debts of a bank, which can be applied if the bank’s assets in liquidation are insufficient to cover all creditors’ claims. This is based on the following conditions: (i) such damages must have been caused through the fault of a related person acting wilfully, or (ii) one of the related parties must have benefited from such actions.

The regulator will also be overseeing a database of ‘blacklisted’ bank officers who are prohibited from working on top positions at banks if they are found to be non-compliant or their institution becomes non-compliant or insolvent.


Oleh Zahnitko is co-head of banking and finance and Olena Savchuk is a lawyer at Gide Loyrette Nouel. Mr Zahnitko can be contacted on +38 044 206 0980 or by email: Ms Savchuk can be contacted on +380 44 206 0980 or by email:

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Oleh Zahnitko and Olena Savchuk

Gide Loyrette Nouel

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