Practice Areas Review: Private Clients/Wealth Management

Wealth Management in Ukraine: Overview of Private Banking

Nickolas LIKHACHOV

Nickolas LIKHACHOV

Counsel, Spenser & Kauffmann

PROfile

Spenser & Kauffmann

Address:
7 Klovskiy Lane,
14th Floor, Kiev, 01021
Tel.:
+380 44 288 8383, 288 6707
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Spenser & Kauffmann is one of Ukraine’s leading full-service law firms. Since it was founded in 2006, Spenser & Kauffmann has been aiming to provide its clients with the highest standards of legal advice and exemplary service. The firm represents our clients in all areas of business law, including mergers and acquisitions, corporate, commercial, antitrust, competition, and insurance law, as well as banking and finance, real estate and litigation.

Over 30 team of talented, ambitious, driven and professional legal advisors provide insight for clients into their legal projects. Our people speak Ukrainian, Russian, English and French, which enables us to understand and communicate with domestic and international clients without any psychological or language barriers.

 


“GLOBAL PRIVATE WEALTH TO REACH AN ESTIMATED USD 198.2 TRN BY THE END OF 2018”
PRIVATE BANKER INTERNATIONAL.

Compared to the West and global business, the development of Ukrainian business started only relatively recently and coincided in part with the collapse of the Soviet Union and the independence of Ukraine in 1991. In this regard, we can conclude that today’s generation of entrepreneurs is rather young and not always familiar with modern wealth management mechanisms. Private Ukrainian business is 20 years young. Accordingly, the vast majority of Ukrainian businessmen were trying, within these first years of their business development, to create wealth rather than to structure and manage their wealth and succession. This situation led to the point where Ukrainian business was not ready for the negative impacts of financial, political and economic crises, which have happened over the last decade in the country.

In 2015 more than 60 banks became insolvent and the national currency (Hryvnia) depreciated by more than 300%. As a result, Ukrainian people do not trust banks, and the banking system as a whole. The high level of corruption, distrust of public authorities and banking institutions, absence of effective regulatory framework for the protection of private wealth lead to a lack of development in the economic sector, to the brain drain, to the fact that the majority of entrepreneurs and affluent individuals in Ukraine prefer to use the services of foreign financial institutions, to the reluctance and fear of investors to invest funds in the development of Ukraine and Ukrainian business.

Private banking services began to develop in Ukraine relatively recently. One of the key problems of this kind of service in Ukraine is the very big difference between people’s income level. Accordingly, an imbalance occurs in the private banking customer segmentation. It should also be noted that in connection with the above-mentioned problem of distrust in the banking system, clients in Ukraine have usually resorted to the option of so-called diversification of risks. In this particular case the diversification of risk refers to the reduction in the risk of loss in the event of a recession that engulfed only one company or one sector of the economy.

The Ukrainian market is very different from what is commonly understood as a classic private banking services industry and wealth management. A different level of product offering exists in Ukraine. In addition, we must understand that there are onshore and offshore solutions. Trying to avoid the rather high level of taxes in Ukraine, local and foreign business owners tend to build cross-border corporate structures. Ukraine has double taxation treaties with more than 70 countries. However, the most preferable jurisdictions for Ukrainian business are the Netherlands and Cyprus.

The classical model of wealth management — relations with customers — shows that in this respect Ukrainian private banking differs very little from European ideology.

At the end of 2012, one of the Big Four auditors conducted a study of the market for private banking and wealth management. In their research they noted that about half of all affluent people in Ukraine receive private banking services in Ukrainian banks; the majority of the banks determines the minimum annual income of a private banking client at USD 120,000; according to the participants of the research, the five leaders in private banking services in Ukraine are: Privatbank, UkrSibBank, Alfa-Bank, OTP and Raiffeisen Aval.

According to the latest research I can identify the following major private banking services in Ukraine: investment portfolio, venture funds, offshore jurisdictions, interbank currency exchange, working with precious metals, investment in objects of art and luxury items, investment consulting and client asset management, deposits, financial planning and other services.

When it comes to private banking clients, two basic segments have been formed to date. The first segment is wealthy individuals, usually top managers or owners of medium-sized businesses, who prefer mass affluent products, VIP-services and who provide funds in trust. Their main goal is to accumulate and to increase their capital. The second segment is high net worth individuals who possess a significant amount of capital that requires the development of a personal investment strategy and portfolio management, a more sophisticated approach to portfolio diversification. Typically, this group is made up of the owners of large businesses and apart from saving their capital they have a goal — succession.

Inheritance rights are governed by Book Six of the Civil Code of Ukraine. According to Article 1216, succession is the passing of rights and obligations (inheritance) from an individual who passed away (the testator) to other persons (the heirs). There are two types of succession in Ukraine — based on a will (testamentary succession) or according to law (legal succession). Inheritance shall include all rights and obligations of the testator as of the moment of opening of inheritance that did not terminate in consequence of the testator’s death.

One of the main requirements of a client of a private banking service is the need to prove their origin of funds. This process is regulated by the On Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Criminal Activity or from Terrorist Financing Act of Ukraine and by the Criminal Code of Ukraine. This Act shall protect the rights and legitimate interests of citizens, society and state by means of determination of the legal mechanism for prevention and counteractions to legalization (laundering) of the proceeds from crime or terrorist financing as well as ensure development of national, multisource analyst information providing Ukrainian and foreign law-enforcement agencies to detect, verify and investigate offences related to money laundering and other illegal financial transactions. According to Article 4 of the Act, legalization (laundering) of the proceeds of crime shall cover any acts related to the proceeds (property) received (obtained) from commiting crime, directed to conceal the origin of such proceeds (property) or assistance to the person who is the associate in crime that is the origin of such proceeds (property).

In accordance with Article 209 of the Criminal Code, effecting financial transactions and other deals involving money or other property known to be proceeds from socially dangerous criminal offenses prior to legalization of incomes, and committing of acts aimed at covering up the illegal origin of such money or other property or their ownership, the rights to such money or property, their origin, location, transfer, as well as obtaining, holding or use of money or other property known to be proceeds from socially dangerous criminal offenses prior to legalization of incomes, is a criminal offence under Ukrainian legislation, which provides for criminal liability and a prison sentence.

As of 2012 I worked for more than three years as Chief Legal Counsel for a commercial bank in Ukraine, which managed to develop and raise the level of private banking services higher compared to competing banks. They key was trying to find an individual approach to every client. When a person first comes to the bank, you do not just tell him about your capabilities, but also try to explore in detail investment tastes and preferences, you arrange for a scope of non-banking services that the potential client may be interested in. The aim is to make them comfortable with you and bring your bank to a “superior one-stop-shop”, rather than to a “just a good bank”.

In general terms there are two main types of clients. For example, if the client is the owner of an operating business or top manager, the issue of earnings is not the most important issue for him/her. It is more significant for them to retain their savings and to have a person who would professionally deals with financial issues. The second type are people that are close to retirement age or already retired, who have a certain amount of funds and who want to earn more but, at the same time, are afraid of losing their savings. So it is necessary to develop a completely different, more averaged strategy. Also, there are clients who deliberately want to go for risk. Therefore, it is important that a particular solution must be chosen for each client, depending on their needs and wishes. The development of Ukrainian business requires the introduction of corporate governance and private wealth management structures. There is a growing need to introduce these structures at the owner level. The age of first-generation entrepreneurs is also pushing them to look into restructuring their businesses to secure their family interests for years to come.

Ukraine still has a hard and long way to go before the implementation of a taxation system and legislative norms in the business sector and wealth management, compatible to European and international standards. Lots of reforms in different sectors and in particular in the area of tax law and financial area are still required to modify and polish these systems in Ukraine and to attract more customers to our banks, prove to Ukrainian users of private banking services that our financial institutions can provide services at a level that is not inferior to international level and to restore confidence in public institutions and banks and the overall level of the Ukrainian economy. The first steps have been already taken and it is possible to see positive results. It is our sincere hope is that Ukraine will continue to move in the right direction.