For the attention of management, Legal and HR departments of banks and other credit organizations

Pepeliaev Group advises that the new Regulation No. 408-P  of the Central Bank of Russia (“CBR”) comes into force on January 31, 2014. This establishes a new procedure for the CBR to approve candidates for management positions at banks, as well as to attest to the business reputation of Board members and shareholders holding more that 10% of the shares in the bank in question.

The CBR’s Regulation No. 408-P (the “Regulation”) introduces new procedure for documents to be submitted to the CBR to attest concerning the professional qualifications and the business reputation of management members of credit organizations and certain other persons listed in Article 11.1 of the Federal Law “On Banks and Banking Activity”.  The most substantial changes relate to the procedure for attesting to the business reputation of directors and shareholders of credit organizations. Moreover, the new requirements for attesting to the business reputation extend to incumbent members of the management, directors and existing shareholders; this would allow the CBR to lawfully demand the removal from office of persons whose business reputation no longer meets the regulatory requirements.   Below we provide an overview of the most important provisions of the Regulation.

  1. CBR Approval of Candidates to the Management Positions

The Regulation establishes a new Questionnaire Form for the candidates, which should be supported by an official criminal record certificate issued by the Russian Ministry of Internal Affairs and a disqualification registry certificate issued by the Russian Federal Tax Service.

The business reputation of a candidate for a management position may be deemed unsatisfactory owing to any of the circumstances listed in Article 16 of the Federal Law “On Banks and Banking Activity”, including among others: a conviction for certain specified crimes; fault established by a court in a bankruptcy of a legal entity; or liability for at least three administrative offences committed over the preceding one-year period in the areas of finance, taxation, securities market or insurance.

Throughout his or her entire term in office, the candidate must report to the credit organization (and through it, to the CBR) any changes to the data in his or her Questionnaire (including, for example, a change of address and, possibly, even a change in marital status) within five days of such changes occurring.   The credit organization must retain copies of such Questionnaires in its own records and must file the originals with the CBR within two days after receiving them.  Updated criminal record certificates and disqualification registry certificates should be enclosed where necessary.  (The validity term for such certificates is set at 30 days).

Persons currently holding management positions at credit organizations are required within 60 days (i.e. by April 1, 2014) to submit to the credit organization a written notice confirming that they comply with the regulatory requirements for professional qualifications and business reputation.  While it is not expressly stated in the Regulation, we believe that the relevant regional CBR departments may also request the official criminal record and disqualification registry certificates for such persons.  Credit organizations must submit the information in question for all their management members to the CBR by May 1, 2014.

It is also important to note that credit organizations are now under an obligation to monitor and identify on their own any instances of non-compliance with these regulatory requirements, including after candidates have been appointed to management positions. When any such instances are identified, the credit organizations must also take the appropriate actions and report the cases to the CBR.  If the CBR detects any instances of non-compliance, it may demand that the management member(s) of the credit organization be removed from office.

  1. Attesting to the Business Reputation of Members of the Board of Directors

The Regulation establishes a Form for the Notice to the CBR that a member of a credit organization’s Board of Directors has been appointed (has left office).   Such a notice should be accompanied by an official criminal record certificate issued by the Russian Ministry of Internal Affairs, the disqualification registry certificate issued by the Russian Federal Tax Service and a handwritten statement by the Board member confirming that there are no circumstances which may lead to his or her business reputation being deemed unsatisfactory.

Given that a credit organization should submit this notice with all the accompanying documents to the CBR within three days after a Board member is elected and that the Russian Ministry of Internal Affairs issues its criminal records certificate in 30 days from the date of it being requested, candidates for Board positions are advised to obtain such certificates in advance before the date of the scheduled shareholders’ meeting where the Board members will be elected. 

If circumstances arise which suggest that a director’s business reputation may not be satisfactory, such director must send a written notice to the credit organization, which it turn must report this to the CBR and take appropriate action to replace the director in question.   If such circumstances are revealed by the CBR, the CBR may demand that the credit organization remove such Board member from office.

Incumbent directors of credit organizations must, within 60 days (until April 1, 2014), provide their credit organizations with a written statement confirming that such directors comply with the regulatory requirements as to the business reputation.

  1. Attesting to the Business Reputation of the Shareholders of a Credit Organization

A completely new procedure is established for the following categories of persons with a view to assessing their business reputation:

  • purchasers and holders of shares in credit organizations;
  • persons establishing (maintaining) control over the shareholders of credit organizations; and
  • CEOs (or equivalent) of the above persons or legal entities.

The Regulation introduces Questionnaire Forms to be prepared regarding the shareholders of credit organizations.  The Questionnaire Form for legal entities requires that extensive and detailed data be provided in relation to the CEO (or equivalent) of such legal entity.  As a general rule, the Questionnaire Form for a legal entity shareholder must be prepared in the personal handwriting of its CEO with his/her official criminal record and disqualification registry certificates enclosed.

It should be noted that the Questionnaire Forms must be prepared both for the shareholders (acquirers) of more that 10% of the shares in the bank and for other persons (entities) who exercise or establish control over such shareholders (acquirers).

Any subsequent changes in the Questionnaire data for such persons must also be reported, including, for example, a change in the CEO of the respective legal entity. A notice of such changes should be accompanied by updated criminal record and disqualification registry certificates.

If the business reputation of such persons or entities is deemed to be unsatisfactory, the CBR may issue a demand requiring them to cure the violation, to reduce their shareholding to a level not exceeding 10% of the bank’s capital or to effect transaction(s) aimed at ceding control over the shareholder(s) of the bank.

Shareholders of a credit organization who currently own more than 10% of shares in that credit organization, as well as persons who control such shareholders, are required, by April 1, 2014, to notify directly the relevant regional CBR departments attesting to the fact that no circumstances exit which could cause their business reputation to be deemed unsatisfactory under the new Regulation.

A similar procedure applies to a group of persons holding (acquiring) more than 10% of shares in a credit organization.

Credit organizations should develop internal documents governing the procedure for information regarding business reputation to be received and processed with respect to persons who are subject to the business reputation requirements.

Foreign legal entities and foreign individuals (whether resident in Russia or not) who fall under this Regulation will also be required to obtain official criminal records and disqualification registry certificates from the Russian authorities; this will enable the CBR to assess their business reputation.  Based on our experience, the Russian Ministry of Internal Affairs sets certain specific requirements for criminal records certificates to be requested and received pursuant to a power of attorney from foreign individuals residing outside Russia.   We therefore recommend that foreign Board members and shareholders be notified well in advance: (i) that they need to obtain such certificates from the Russian authorities; and (ii) of the procedure for doing so.