Restrictions on Bank Administrators, Important Stockholders Pose Risks
03 May, 2012

The recent changes authorizing Georgian Central Bank to set additional restrictions on administrators and significant stockholders is supposed to make the banking regulation instable and scare investors off. Georgian Central Bank assures the change is just a technical thing and falls in line with the best international practice.

Early in last April Georgian parliament approved changes to the law on “Commercial Banks” empowering National Bank of Georgia (NBG) to set out additional eligibility criteria for administrators and significant stakeholders [who hold

more than 10% of banks] of banks through issuance of a normative enactment. The questioned criteria are already defined in details by the law since 2002 however legislative changes made in banking regulation within past several years laid ground to making legal basement stronger, NBG explains.

“The given change streamlines just technical defect,” NBG commented to Georgian Journal, “Besides, it is in line with the best international practice. Taking into account the best practice of the countries with developed banking system, definition of the eligibility criteria for administrators of commercial banks falls within the competence and authority of financial sector supervisory body.”

Georgian economic analysts agree that central bank has full power to set out apt regulatory restrictions but taking into account Georgian realities they fear that authorizing the NBG to mold  extra restrictions based on normative enactments alone may make the regulation instable and the NBG more politicized. Experts presume that it is a follow up of the series of politically grounded changes enhancing the NBG competence made since past fall when Georgian tycoon Bidzina Ivanishvili opposed Georgian authority as a politician and government started cracking down on his business including Cartu Bank [where the NBG started a financial probe under allegedly money laundering suspects] as well as Progress Bank where Ivanishvili acquired shares after his political career started. Experts expect the changes to affect Georgian financial market and investment climate at large.

Zurab Gvasalia, Head of Association of Georgian Banks, assures the last change on additional restriction for administrators and shareholders at banks is just a technical thing and creates no ground for alarms.

“When the NBG set out some limits or restrictions before commercial banks have always been complaining that it lacked legal base for the law did not envisage it, now all will be legally streamlined through normative acts,” he told GJ.

But economic analysts believe the change is quite redundant for the active legislation suggests completely sufficient criteria to this end.

According to the active legislation a person cannot get significant share at banks if he/she has been convicted for heavy or especially heavy crime, financing terrorism/illicit income legalization or any other economic crime. Also, a person can take a post of administrator at banks if court did not recognize the person disabled and has no previous convictions for heavy or especially heavy crime, financing terrorism/illicit income legalization or any other economic crime. Also an illegible administrator candidate must have relevant education or experience, and should not hold a post of administrator at any other bank.

“The recent change is in line with the already made changes suggesting more restrictions. Additional changes are not pleasant to business and send a negative signal to potential investors the more so that the already active legislation includes sufficient criteria for administrators and significant stakeholders and there was no need for extra restrictions,” Irakli Lekvinadze, an economic analyst said.

Lia Eliava, an economic analyst, believes Georgian banking system really needs better regulation as far as there has always been and still circulate non-transparent capital of dubious stakeholders registered in offshore and if the recent change adopting extra restrictions for banks’ administrators and shareholders aims to filter Georgian banking sector  from criminal capital it is a positive move.

“The practice of selecting shareholders of commercial banks is very corrective and well-balanced from political and moral points of view in developed world…observing anti-trust rules, financial stability of potential shareholder, law-obedience with tax service and especially the capital transparency fall under focus to this end there…How Georgian central bank will share this best practice and how it will work out requirements toward banks based only at its discretion is difficult to predict. We can only assume that in the worst case it will refuse a potential stakeholder if he/she had been not convicted but only suspected in crimes envisaged by the current law for example in financing of terrorism, or may be some trifler crime like administrative infringement [not envisaged by law before] will be ground for refusal,” Eliava said in the interview with GJ.

Lekvinadze believes the change is more for pre-elective period to crack down on certain banks than for better regulation illicit incomes.

“There was a special anti-money laundering body in Georgia but they revoked it for they found it not necessary and assigned its function to a small department at financial supervisory service of the NBG. Now they introduced number of anti-money laundering changes during  last few months like obliging banks, accountants and auditors to report immediately confidential information of their clients if they see something. Now this last change, why all these special anti-money laundering remedies are so urgent?” Lekvinadze asked.

According to Eliava, measures undertaken by the NBG to control structure of stakeholders at banks were not effective as of yet for it was selective and biased. Number of banks were sold without disclosure of information on its new owners within last years in Georgia because legislation allows this.

“Firms of uncertain ownership registered in offshore zones still successfully operate as stakeholders of banks in Georgia and no banking regulation including legal enactments of the NBG sets out requirements that holders of banking license must present papers on origins of share capital,” Eliava elaborated.

She shares her colleagues’ fears that the NBG may misuse the extra restrictions on political ground as it lacks the reason.

“Legislative changes worked out by the NBG or through its participation lately lacked both economic and supervisory reasons. The last change seems not to be the exception for the current law on commercial banks already includes licensing criteria and creation of additional legislative enactment on practically similar issues begets questions. The thing that the NBG is plunged in political process is an alarming fact. Central banks’ unlimited power globe over  are  associated with their independence [from government] and its involvement in political games will lead the country’s economy and financial sector to serious problems sooner or later, the world history does know plenty of samples of this,” Eliava said.

Commercial banks refrain from making comments on the change.

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