Without B2B Jewelry: Ukraine wants to ban financial pyramids

Members of Parliment want to protect Ukrainians from the activities of financial pyramids. Last week, the Verkhovna Rada supported the Draft Law in the first reading. The Ministry of Finance of Ukraine analized what this document is about and whether it will help protect the trusting clients.

The authorship of the Draft Law belongs to a group of Members of Parliament headed by the Chairman of the Committee on Finance, Tax and Customs Policy Danylo Hetmantsev. According to his estimates, there are more than 100 financial pyramids in Ukraine today. A list of dubious financial projects, which include 113 companies, has been published on the website of the National Securities and Stock Market Commission (hereinafter the NSSMC). All of them have signs of financial pyramids, but continue to operate legally in Ukraine.

One of the brightest examples is B2B Jewelry, which, according to Danylo Hetmantsev, deceived 600,000 citizens for a total of 250 million USD. But despite the wide publicity in the press and the Security Service of Ukraine investigation, it still lures the depositors with “profitable” offers.

Maksym Libanov, the Commissioner of the NSSMC, says that such a possibility exists in financial pyramids due to the lack of powers of the Regulator. They say that the legislation lags behind the realities of life.

«The NSSMC is now the only authority in the system, which has an expert resource to counter this phenomenon, but does not have the instruments to really fight and prevent abuse in the financial market. Therefore, it is necessary to add new powers for the NSSMC to prevent violations and SCAM projects – research functions, access to the information not only about securities, but also about the movement of funds, testimony of victims, etc.», he explains.

The expansion of the powers of the NSSMC is only part of the innovations of the Draft Law.

The pyramids are officially recognized and banned

According to our legislation, there are no financial pyramids in Ukraine – any law defines this phenomenon. That is why, neither the Regulator nor law enforcement officials can effectively counteract it: from the point of view of the law, defrauders conduct ordinary entrepreneurial activities.

The Draft Law corrects this gap by providing a clear definition of the financial pyramid and describing its activities. Iryna Nyzka, a lawyer at LA Mishechko & Partners, explains that the Draft Law also amends Article 165 of the Law of Ukraine on Capital Markets and Organized Commodity Markets, which establishes a direct prohibition on the creation and operation or promotion of financial pyramids. In other words, at any stage of its existence, the financial pyramid is recognized by law as illegal.

The Draft Law significantly expanded the list of measures of influence that the Regulator can resort to. Among them are a public warning, a fine, a revocation of a license to operate in the capital markets, the suspension of such a license, and a prohibition on transactions in financial instruments.

«It is planned to apply financial sanctions to legal entities in the amount of up to 10 million UAH or up to 5% of the total annual turnover of such legal entities», said Maksym Bahniuk, the Chief lawyer of law firm WINNER.

These innovations will be allowed, if not completely exclude the possibility, then at least greatly complicate the emergence and operation of financial pyramids. Instead, they do not solve in any way the problem of those who have already suffered from their activities.

«As for the financial pyramids that exist today, bringing the perpetrators to criminal responsibility, the recovery of damages is possible only in criminal proceedings, moreover, the law will enter into force only on January 1, 2023. Therefore, there is no hope to prosecute the organizers of the existing pyramids and return the money», said Maksym Bahniuk, the lawyer of law firm WINNER.

However, according to Iryna Nyzka, a fellow lawyer at LA Mishechko & Partners, there is a chance that the victims will return the money they invested.

«Only if there is something to return; that is, at the time the Commission applies influence measures, the financial pyramid will have real assets at its disposal», she specifies.

The fraudsters can be imprisoned

The Draft Law contains no direct provisions for criminal liability of the organizers of financial pyramids. However, the NSSMC is expected to work closely with other government agencies, including law enforcement agencies. And this is what the security forces lack now for the effective fight against fraud in the financial markets.

«If the inspection reveals signs of a violation, the prosecution of which is not within the powers of the NSSMC, it will be able to send the case materials to law enforcement agencies», Maksym Bahniuk said.

The law enforcement agencies will investigate criminal cases directly, and the courts will determine the punishment. Therefore, if there are good lawyers, the organizers of the financial pyramids will be able to prolong the investigation indefinitely, not to mention the consideration of the case in court.

What they offer to do

The NSSMC is optimistic about the consequences of introducing legislative innovations.

«We hope to significantly reduce the current number of SCAM projects and prevent their cases in the future. I think the understanding that there is a Regulator in the market, which can apply certain measures for violations, will encourage market participants to work honestly and openly», Maksym Libanov said.

Experts say the Draft Law needs to be finalized. First of all, it concerns the rules that establish the procedure for imposing sanctions by the NSSMC.

For example, now the Draft Law specifies only the limit for the amount of the fine, while the size of the sanctions is not ranked according to the severity of the violation. The amount of the fine will be determined by the Regulator, and this, according to experts, carries significant corruption risks.

The NSSMC rejects this assumption and explains that in choosing the law enforcement measure, the authorized person will take into account the nature, duration, consequences and other circumstances of the offense, to which the entity has taken measures to compensate for the damage that contributed to the investigation.

In addition, the emergence of corruption risks or conflicts of interest will block the implementation of four levels of supervision in the market and, accordingly, four categories of authorized persons.

«In each case, there will be specially selected, newly appointed specialists. At each stage, both sides will have the opportunity to involve independent experts, which will help to make the processes as objective as possible», said Maksym Libanov, the Commissioner of the NSSMC.

Source: Мінфін