Tight Supervision Undermines Georgian Financial Market
09 February, 2012
Tight Supervision Undermines Georgian Financial Market

The recently tightened regulation is believed to undermine Georgian financial market and   deteriorate business climate of the country.
A number of significant amendments made to the organic law on the National Bank of Georgia (NBG) that entered into effect on January 1, 2012 empower Georgian Central Bank to request “any” information [including the confidential] from financial market players even on an attempted deals. Besides, amendments give the NBG a new power to trade in gold exchange-traded products outside the law

on Securities at its own discretion and repeatedly emphasize that the NBG can cooperate with law-enforcers.
At the first sight the amendment looks innocent as far as Georgian central bank actually was authorized to request confidential information at special circumstances and within its competence in case of grounded criminal suspects or litigation process and cooperate with law-enforcers. But what makes financial market players and non-governmental watchdogs worry is adoption of the word “any information” and special emphasis on the competence of supervisory bodies regarding the information request.
According to Natia Kutivadze, a legal expert with International Transparency Georgia (IT Georgia), the law on the NBG included determination of the NBG power on information request from supervised bodies but this competence was disseminated in the law in sundry paragraphs and never included the word “any” till a new prima paragraph number 33 elaborating precise terms of information request was added to the questioned law in June of 2011that led to unprecedented increase of the NBG power.
The similar wording was repeated by the end-December of 2011in other paragraphs.
“Prior to amending the law the NBG had already had the power to request any information to implement its functions (Articles 331 and 45). However, Article 48 and Article 50 have been amended to put further emphasis on the right. Therefore, questions regarding appropriateness of the amendments should have been raised when these were adopted,“ Kutivadze said in the interview with Georgian Journal.  “This is an unprecedented thing, not a single central bank of any other country including the European Central Bank [that have more advanced regulations] has this kind of power to request “any” information. In the EU countries including the post-soviet states necessary information can be requested only in the cases set out in the law”.
According to her, letting the NBG request “any” commercial information (including confidential) allows for excessively broad interpretation and carries the risk of making any beneficiary liable to explain the origin of the money they received. It is possible that a recipient of the money, who could not be aware of the fact that his/her partner’s money had been generated through illegal means, might be held accountable, which is unfair and conflicts with the principle of bona fide entity.
Besides, the burden of proof rests with the state, which means that a beneficiary should not be held accountable for lawfulness of the money he/she received in case it turns out to have been made illegally at some stage. If the regulator or a law enforcement body holds such suspicion, they should be made liable to prove it.
Moreover, the international watch-dog fears that new discretion of the NBG allowing the supervisory body to outline technical description of the terms and conditions that apply to the trade in gold exchange-traded products  bypassing the law on Securities that regulates stock exchange generally undermines the yet underdeveloped stock exchange market of Georgia.
The latter amendment was approved through violation of law: it was introduced and approved during the third parliamentary hearing bypassing committee hearings, while according to Georgian law, only editorial remarks can be made to the bill during the third hearing.
By the recent amendments the NBG and the Financial Monitoring Service (FMS) can request information on attempted deals too. What the information regarding attempted deals implies or what information a financial institution should produce to the NBG remains obscure.
“An attempt to conclude a deal is, in effect, an unconcluded agreement. We believe it is not fair to encumber a financial institution by the responsibility to inform a regulatory body of unconcluded agreements or hold them accountable for the failure to do so. Under the law, a failure to inform the FMS is a crime, and if the FMS or law enforcement bodies later detect elements of crime in an unconcluded agreement through their own channels and find out that the parties to the agreement attempted to carry out transactions through a commercial bank or other actors not delivering of information will be taken as a crime too,” Kutivadze said.
Besides it is hard to imagine how financial institutions can collect information on attempted deals for they are not normally monitored by banks.
TI Georgia believes that tightening control on the financial sector without precise mechanisms to prevent abuse of the power will have a negative impact on the business confidence and may cause cash drain from the country. Foreign business partners of Georgian businesses may not want to reveal any kind of commercial information, which, in its turn, may urge them (the partners) to opt out.
Ditrikh Muller, a co-founder of broker Georgian Investment Group, is embarrassed by the changes.
“I completely agree with TI Georgia fears and add on my side that these here changes will ruin down Georgian financial market. All investors will be scared off. How can I attract investors if I ask them to provide me by all confidential information on their  companies and partners beforehand during negotiations?  This will undermine Georgian financial market, the single successful sector of Georgian economy,” he said.  
The international watch-dog can hardly figure out what but economic crime [money laundering] and terrorism fears could push government to such radical changes that undermines Georgian investment climate. The more so that Georgian anti-money laundering law provides with sufficient mechanisms to combat the crime that troubles Georgia very seldom in fact. TI Georgia asks parliament and the NBG to examine whether the possible effect of economic crime outweighs the impact of decrease in business confidence.
Muller believes the changes aim to crackdown on business of Bidzina Ivanishvili, a Georgian billionaire with political ambitions, to prevent money-transfers from Ivanishvili’s foreign assets to Georgian accounts for financing the pre-election campaign this year.
“But is this one man worth of ruining the entire financial market?” Muller wonders. The NBG makes no comments on the subject.    

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