Member Article

On Jan. 29, the National Bank of Ukraine adopted a regulation on the procedure for granting residents individual NBU licenses to transfer hard currency outside Ukraine as payment for monetary assets. According to this new regulation, prior to making a payment in hard currency to a non-resident seller of monetary assets - except for external government T-bills -, a resident purchaser must obtain from the NBU an individual license authorizing the remittance. A brief retrospect The requirement for a license has been in place since long before the NBU issued this regulation. It was established by a Cabinet Decree on the system of currency regulation and currency control signed Feb. 19, 1993. However, the requirement was virtually unenforced by the NBU. The bulk of transactions falling under the licensing requirement were trades in shares of stock of Ukrainian companies that emerged in the process of privatization of state property. Non-residents, including off-shore companies established by wealthy Ukrainians and Russians for the purpose of participating in privatization or stock market arbitrage, were actively buying and selling Ukrainian stock. In the early days, the NBU was trying to enforce requirement, but its stance soon “softened”. Off-shore payments for the stock bought from non-residents were perceived as “repatriation of foreign investment in hard currency made on the territory of Ukraine due to the cessation of investment activity”. And that, according to the original Decree, did not require a license. Defining monetary assets The regulation does not specifically define monetary assets, for which payment is subject to the licensing requirement. However, certain wording in the regulation leads to the conclusion that only securities shall be considered as monetary assets for purposes of this regulation. This is a little bit surprising giving that the regulation’s preamble states that it has been developed in accordance with the 1993 decree. In contrast to the regulation, the decree contains a detailed list of objects, which are considered monetary assets: · Ukrainian currency; · various securities and commercial paper nominated in Ukrainian currency; · foreign currency; · various securities and commercial paper nominated in foreign currency; and · precious metals. Getting a license Residents seeking a license need to submit a number of documents to the NBU: · an application in the form provided as the annex to the regulation; · an original or notarized copy of the Securities Sale and Purchase Agreement; · an original or a copy of the entity’s taxpayer registration certificate issued by the applicant’s tax authority, provided the applicant is liable for taxes; · a certificate issued by the applicant’s bank that specifies details of the bank account to be used by the applicant for the hard currency remittance abroad; · a copy of a document evidencing the state registration of any foreign investment; · a notarized copy of an agreement evidencing the prior acquisition of the securities by the investor, accompanied by documentary evidence of performance of such an agreement, such as a statement of securities account issued by a depository, and so on; · a bank certificate evidencing that the funds paid by the investor for the securities were actually remitted to Ukraine; · a copy of the official release on the securities listing or, if the securities are not listed, a document evidencing value of the securities according to applicable law. Waiting for a decision Normally, the NBU shall consider the documents filed by the applicant and decide whether to grant a license within 20 business days. If the NBU requests additional documents from the applicant, the term is extended for 10 business days, starting the day the applicant submits these additional documents. The regulation requires the NBU to send copies of all applications to the Anti-Organized Crime Offices of both the Ministry of Internal Affairs and SBU, Ukraine’s security service, and to request their opinion of the application. If no response comes within the term of consideration by the NBU, the Bank goes ahead with its decision. Having considered the application documents the NBU either issues a license or turns down the application in writing, specifying its reasons. The regulation contains an extensive list of reasons for refusal: · the application is incomplete or does not comply with the regulation; · the documents filed with the NBU contain untrue information; · the Ministry of Internal Affairs of Ukraine or the SBU turn down the transaction; · the transaction was completed before a license was issued; · the applicant is in bankruptcy proceedings; · the applicant has been subjected to sanctions – a fine, individual licensing regime, suspension of foreign economic activity, and so on - under Art. 37 of the Law on foreign economic activity; · the transaction is considered “suspect”. In Art. 64 of the Law on banks and banking activity “suspect transactions” are defined as: (a) performed under irregular or unreasonably convoluted circumstances; (b) commercially unreasonable, or (c) in violation of Ukrainian law. Each license is valid for 90 days and cannot be transferred to any other entity. The applicant may petition the NBU to amend a license within 10 business days from the day when the circumstances that necessitated the amendment arose. The NBU shall consider the amendment within 20 business days. Why now? The NBU seems to have tightened its control over purchases of securities by residents from non-residents for two main reasons. First, such sales were perceived as a convenient instrument for sophisticated resident entrepreneurs to channel their profits abroad, to offshore tax havens. The importance of this scheme for Ukrainian “tax planners” is somewhat overestimated, however, compared to such “tax optimization” arrangements as buying goods through an offshore intermediary that anchors the profit, payments under Consultancy Agreements, and royalty payments. Surely, securities sales do not account for the bulk of the money that have fled the unfriendly Ukrainian business environment. Secondly – and more likely – the adoption of this regulation seems timed to pacify Western crusaders against money-laundering and to demonstrate the willingness of Ukrainian officials to joint the fight. It remains to be seen if this move has any effect on FATF taking Ukraine off its black list.

 

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