The former CEOs and owners of banks are increasingly frequently forced to bear subsidiary, and sometimes, criminal liability even where they bear no personal relation to gaps occurring in the balance-sheets of their credit organizations. Boris FEDOSIMOV, the Chairman of Moscow Arbitration and Tax Bar of Attotorneys “Business ­People”, told in his interview to NBJ what help the Bar Association can offer to bankers and existing credit organizations in such situation.

NBJ: Boris, as far as we are aware, over the last years, you and members of your Bar Association have been actively protecting owners and senior executives of banking organizations. Has the number of bankers applying to your Bar Association increased over the last two to three years?

B. FEDOSIMOV: Yes, it has absolutely. Such applications have become more frequent and there is an explanation for this: the supervision and regulation of banking operations have become more stringent recently. Every decision of a supervisory authority to revoke a licence affects the destiny of many people – not only chairmen of executive boards or boards of directors, as it was before, but also those who is a senior executive and owner of the credit organization. The practice of taking them into custody during pre-trial investigations, holding them subsidiarily liable and convicting them in criminal proceedings is becoming increasingly popular.

NBJ: Put in another way, bankers’ exposure to risk has spiked?

B. FEDOSIMOV: Yes, it has, and people realize this. I normally advise my clients not to wait until the Russian Central Bank revokes their banks’ licenses but contact us well in advance. First of all, because our Bar Association is able to help them extend the life of their entity – we develop recommendations for banks on how to interact with the Bank of Russia in an optimal way, how to properly respond to the regulator’s compliance orders and how to correctly answer its letters. This may seem to be just a formality. However, in reality, all this shapes the Russian Central Bank’s opinion on the entity being under its surveillance. Secondly, we coordinate the most problematic deals of the banks, highlighting any potential adverse implications for the bankers.

NBJ: However, even this help is hardly to save a bank if the regulator makes the known decision.

B. FEDOSIMOV: Well, we realize that a strong majority of banks is going to leave the market but there is a fine line for a bank between surviving for another year or five years. Over and above, we offer credit organizations such option as proper preparation for bankruptcy. Indeed, while a bank is alive it seems that it is OK but once it loses its license we almost always hear from the Russian Central Bank or Deposit Insurance Agency that the bank has a hole in its balance-sheet. And nobody falls to thinking how this could happen that there was no hole yesterday and it emerges all of a sudden today?
 
NBJ: Everything is fairly straightforward: The temporary administration transfers a portion of loans to lower quality categories with a portion of assets being recognized as either missing or depreciated.

B. FEDOSIMOV: That’s the way it usually happens. The problem often consists in bankers being unprepared for such a scenario. A bank may be considered as insolvent for two reasons: it is unable to satisfy its creditors’ claims for 14 days or its liabilities exceeds its assets. In our experience, the first reason is almost always the case but the second may be challenged. For some unknown reason, bankers never do it believing that it would be just a waste of time because if there is the first reason, then the bank will “die” in any case. “Why should we pay lawyers for then?”, they ­figure.

NBJ: They should do this not to be held criminally liable for asset dissipation.

B. FEDOSIMOV: You are absolutely right, and that is just what we are trying to explain our clients. And this is where we smoothly switch over to the next question: when the case comes to the hands of the Investigative Unit, Main Investigative Directorate, Russian Ministry of Internal Affairs, or the Investigation Committee, it becomes very difficult for bankers to prove correct. Investigators prefer to follow a simple way: they show ignorance about banking laws and the provisions of Regulations issued by the Bank of Russia № 254-P or № 283-P is a thick forest for them. But they go into the details of the transactions highlighted by the Russian Central Bank or Deposit Insurance Agency and study the degree of affiliation between the bank and related companies. What they want is to close the case as a matter of top priority and take it to court, so the banks’ senior executives, owners, average executives and even clients cannot avoid menticide on their part. It is for this very reason that in such scenarios our help must be integrated. Weak link may jeopardize the entire defense line.

NBJ: I reckon the situation in courts is probably also far from ideal.

B. FEDOSIMOV: Definitely. Our judges lack knowledge of tax or banking laws. An attempt to explain in court that bankers are not guilty and that transactions were not part of a scheme and were consistent with laws normally wind up failing unless such cases are followed up by lawyers who know how to built a defense line and how to properly communicate with judges.

NBJ: You mentioned subsidiary liability of bank owners and senior executives. What is the case with that?

B. FEDOSIMOV: We have recently undertaken an analytical study on cases involving banks whose licenses were revoked from 2005 until the present time. The main result of the study is as follows: the number of precedents when courts adjudicated subsidiary liability not just increased - it has increased exponentially. As early as 10 year ago, the handing down of such a court decision would be likely exception from the rule with a range of persons held subsidiarily liable expanding. And what is meant here is that persons are put under the obligation to pay hundreds of millions and even billions of Rubles. Most often, people are just unable to do that and they have no alternative but to file for personal bankruptcy. This entails not only a frustration of their habitual lifestyle but also carrier.

NBJ: This is all sad but there is a firm belief that you cannot win struggling against the Bank of Russia nor the Deposit Insurance Agency.

B. FEDOSIMOV: Learning from our experience, I can tell with all responsibility that this is a myth. By no means, it is very difficult to challenge such entities but it is possible. As an example: we filed a claim with the Constitutional Court of the Russian Federation to protect not just individual companies but banks generally. The claim was underlain by existing Article 21 of Federal Law № 395-1-FL “On Banks and Banking Operations” pursuant to which banks may challenge orders issued by the Russian Central Bank. But on the other hand, the problem consists in that there is Federal Law № 127-FZL “On Insolvency (Bankruptcy)” containing an article saying that an order revoking a bank license may be appealed against only by one person.

NBJ: Shareholder?

B. FEDOSIMOV: No, the Chairman of the bank’s Executive Board. And, as you are well aware, in 90% of scenarios, this is a salaried employee. If he is willing to mess with the Russian Central Bank, Deposit Insurance Agency or court? Of course, not. This must be rather handled by owners. However, they do not possess such right under the bankruptcy law. So the point of our petition lodged with the Constitutional Court of the Russian Federation is to seek the recognition of the two above mentioned articles as contradicting the Constitution of the Russian Federation. They deprive a bank’s beneficiaries of access to courts which is secured for them by the Constitution.

NBJ: So it seems that laws, judicial practice and investigative practice relating to such cases need to be adjusted, t.i. the entire system has to be changed?

B. FEDOSIMOV: Absolutely! But, along with that, bankers’ attitude to protecting their interests both as those of a private person and of a bank must be changed. Even if a bank is OK now then the engagement of a professional lawyer would be a preventive measure to avoid problems in future. Not to mention that when the license has already been revoked, there is no financial way to secure adequate protection for the bank’s senior executives and shareholders. You should not be guided by the persuasion that if this could have happened to others. this may never happen to you.