Memorandum with the IMF. Is it really possible to ban the owners of bankrupt banks from participating in privatization?

Column by Andriy Volkov, banker, financier, founder and partner of Investohills Group of Companies for NV.Business.

Ukraine promised the IMF to ban the owners of bankrupt banks from participating in privatization. There are no mechanisms for fulfilling this promise yet.

At the end of November, following the completion of the revision of the stand-by program for Ukraine, the International Monetary Fund published the text of the Memorandum on Economic and Financial Policy. The implementation of the provisions of the document will allow Ukraine to receive $2.2 billion from the IMF, which is necessary to ensure macroeconomic stability. Among other points articulating Ukraine’s policy in the financial sector, the Memorandum also announced a ban on former owners of failed banks to participate in public procurement and privatization. The measure applies to controlling persons and business entities associated with bankrupt banks and will be applied if there are legally confirmed debts to the Deposit Guarantee Fund of Individuals.

In addition, the Memorandum notes that Ukraine undertakes to strengthen the work on the return of assets by former owners and related parties of bankrupt banks.

It remains to answer the question: how realistic is it to fulfill the requirements of the IMF and what is needed for this?

What will be required

Among the legislative solutions and algorithms by which Ukraine will be able to fulfill its obligations to the IMF, there are those that literally “lie on the surface.” So, in the spring of this year, the Verkhovna Rada unblocked the so-called “big privatization” at auctions, which are held on the principle of price increases. At the same time, the Law “On Privatization of State and Municipal Property” generally allows former owners and managers of bankrupt banks and businesses to buy new enterprises (although it contains some restrictions on persons who cannot be buyers). In order to stop this practice (and in order to implement the Memorandum), it is necessary, at least, to fix the basic requirements for the business reputation and property status of potential buyers of large-scale privatization objects in the Law “On Privatization”. In turn, the State Property Fund of Ukraine should get the right to detail and apply such requirements.

But you need to understand that in order to implement such legislative restrictions, it is necessary to rebuild a complex multi-stage procedure for verifying the source of funds — both legislative and operational. Another mechanism prohibiting the former owners of failed banks from participating in privatization will simply not work.

What’s already working

There is already a successful example of using such a procedure in Ukraine. In particular, the former owners of bankrupt banks are no longer able to open new banks. They are prevented from doing this by a single institution — the National Bank of Ukraine.

In accordance with the Law “On Banks and Banking Activities”, when an individual or legal entity purchases a stake in a bank, the NBU checks their business reputation and financial (property) condition. The requirements for the reputation and financial condition of potential bank owners are detailed in the Regulation on Licensing of Banks, which is approved by the regulator.

For example, the fact of owning shares or working in the bank’s management bodies during the last year before being declared insolvent and/or revoking the bank’s license will be grounds to recognize a person’s business reputation as flawed and refuse to acquire a stake in the bank.

It is not enough just to change people in management or to dismiss simple performers. We need a serious institutional reform of the relevant bodies and serious changes in the legislative framework

In turn, the requirements to the financial condition imply not only the obligation to prove the availability of funds for the purchase of a share, but also the availability of additional financial resources (in proportion to the part in the regulatory capital) that may be needed to support the bank’s activities, as well as the sources of origin of all these funds. Such a system makes it possible to prevent “bankers” who illegally enriched themselves on the collapse of one bank from owning a new one.

We must pay tribute, the NBU system works quite effectively. And first of all, due to the fact that the National Bank is a well-organized structure that controls this issue and takes a principled position with respect to the owners of bankrupt banks.

What doesn’t work at all

But the NBU’s policy among government agencies is rather a strong exception than the rule. For example, the repurchase by debtors (legal or natural person) of their own debts from the DGF is also prohibited by law. Nevertheless, this prohibition does not stop anyone in any way: a huge number of debtors — from small to large, through front persons or intermediaries, quite calmly redeem their debts in any volume. For example, the media has repeatedly covered the situation around the assets of some oligarchs, published a list of companies affiliated with them, reported that such companies participate in auctions for their assets and safely buy them out. In other words, citizens are informed, illegal actions are condemned by the public, even the courts go, but nothing happens.

By the way, Ukraine may face similar problems when implementing the recently adopted Law on Oligarchs. After all, the oligarchs’ businesses that are on the NSDC sanctions lists are already functioning without any difficulties or restrictions.

As for Ukraine’s obligations to strengthen the work on asset recovery, they cause some confusion. Especially the promise to create a comprehensive strategic document and action plan by the end of February 2022. I would like to remind you that there are already two bodies in our country that have been working on asset recovery for years – the DGF and the special National Agency of Ukraine for the identification, search and management of assets obtained from corruption and other crimes. What prevented them from making additional efforts or at least developing an action plan before drawing up a Memorandum with the IMF?

Perhaps the problem is the lack of the necessary experience and competencies? Or is it a corruption component? But it is obvious that private companies that specialize in asset tracing (with the right to sue on behalf of the state of Ukraine and share the proceeds with the state) could demonstrate much greater efficiency. Because, as practice shows, if state structures begin to deal with the return of assets, then as a result Ukraine receives wasted budget money and the flourishing of corruption. At the same time, it is not enough to simply change people in the leadership of these structures or dismiss ordinary performers. We need a serious institutional reform of the relevant bodies and serious changes in the legislative framework. Otherwise, Ukraine will not be able to solve the problems with the ex-owners of bankrupt banks.