A number of significant amendments enhancing the powers of the National Bank and Financial Monitoring Service have recently been made to the legislation on financial regulation.

• The power of the National Bank to request any information

The legislation put further emphasis on the right of the National Bank to both request and receive any information (including confidential information) from commercial banks and other players in the financial market (Article 48 (4) of the Law on National Bank).

Prior to amending the law the National Bank had already had the power to request any information to implement its functions (Articles 33¹ and 45). However, Article 48 and Article 50 have been amended to put further emphasis on the right. Therefore, questions regarding appropriateness of the amendments should have been raised when these were adopted.

Letting the National Bank request “any” commercial information (including confidential) allows for excessively broad interpretation and carries the risk of making any beneficiary liable to explain the origin of the money they received. It is possible that a recipient of the money, who could not be aware of the fact that his/her partner’s money had been generated through illegal means, might be held accountable, which is unfair and conflicts with the principle of bona fide entity. Apart from this, the burden of proof rests with the state, which means that a beneficiary should not be held accountable for lawfulness of the money he/she received in case it turns out to have been made illegally at some stage. If the regulator or a law enforcement body holds such suspicion, they should be made liable to prove it.

The EU countries, where banking is subject to more advanced regulation, do not resort to such far-going measures of supervision. National banks are not entitled to request any information from all players in the financial market or private persons either in the post-socialist Europe (the Czech Republic, Estonia, Slovenia, Slovakia) or the old Europe (Finland, Germany). Moreover, neither is the European Central Bank (ECB) entrusted with such power.

Furthermore, in these countries necessary information can be requested only in the cases set out in the law. For example, the Czech National Bank coordinates the banking information system (Article 41 of the law on National Bank), being entitled to request necessary information (rather than “any” or “confidential”, as the Georgian legislation has it) and relevant documents from banks and other entities listed in the law to implement its coordination function. The principle is both simple and liberal: the National Bank requests specific pre-defined information. The time limit for submitting the information and the accompanying documents is also set forth in the law. The law sets out in detail the rules on what use the information may be put to, which, while ensuring the prevention of undue disclosure of commercial information imposes specific liability on a given party for illegal use of information. Only when a reasonable doubt concerning the completeness or accuracy of the provided information is raised may a financial institution be requested to provide additional information or explanation. Unfortunately, none of the Georgian regulations (including orders by the President of the National Bank and the Head of the Financial Monitoring Service) establish any mechanism for preventing the disclosure of commercial information other than ex-post responsibility. We believe that effective regulation as well as prevention of improper use of information is far more important in the circumstances when the National Bank is entitled to request any information (including confidential) from all players in the financial sector without exception.

• Regulating securities market outside the law

The recent amendments to the law on the National Bank (Article 66) gave the National Bank a new power to trade in gold exchange-traded products outside the law on Securities. Trade in gold exchange-traded products, in effect, belongs in the securities market. What National Bank could do is to give technical description of the terms and conditions that apply to the trade. With the Georgian securities market markedly underdeveloped, its improvised regulation will only further aggravate the situation (while the procedure requesting information from currency exchange booths may be detailed in a bylaw, the securities market has to be regulated by law). It noteworthy that the provision in question was added to the draft law during the third hearing, which is a violation of law: a third hearing allows merely editorial changes to the draft law.

• Information on the attempt to enter into financial agreements

By the recent amendments the National Bank and the Financial Monitoring Service can request information on attempted deals. Thus the right to request “any” information includes the information on attempted deals as well (Article 17 of the Law of Georgia on Commercial Banks). What the information regarding attempted deals implies or what information a financial institution should produce to the National Bank remains obscure. An attempt to conclude a deal is, in effect, an unconcluded agreement. We believe it is not fair to encumber a financial institution by the responsibility to inform a regulatory body of unconcluded agreements or hold them accountable for the failure to do so. Under the law, a failure to inform the Financial Monitoring Service (FMS) is a crime, if the FMS or law enforcement bodies later detect elements of crime in an unconcluded agreement through their own channels and find out that the parties to the agreement attempted to carry out transactions through a commercial bank or other actors.

Unfairness aside, it is hard to imagine how financial institutions can collect information on attempted deals. Attempted deals are not normally monitored by banks. No national bank in any of the countries we studied requests information on attempted deals. Such powers can only be justified if the regulatory body is to prevent crime. The law, however, does not allow this. We believe crime prevention by regulatory bodies requires a detailed explanation.

• New powers granted to the Financial Monitoring Service

In cases provided for by the Georgian legislation the Financial Monitoring Service is also granted the power to receive information on any deals (including attempted deals), accounts, transactions carried out from accounts as well as balances therein (Article 32 of the law on Securities). Other agencies or private individuals are allowed to receive the information if allowed by court. Moreover, the National Bank and the Financial Monitoring Service have access to the information regarding insurance operations, transactions and attempted deals (Article 29 of the law on Insurance).

• The impact of the amendments on the financial market and business confidence

Transparency International Georgia believes that tightening control on the financial sector and granting the regulators access to confidential commercial information without having mechanisms in place to prevent abuse of the power will have a negative impact on the business confidence, which may have varying repercussions on the decisions of businesses/individuals or the business confidence in general. The amendments may as well cause cash drain from the country. Foreign business partners of Georgian businesses may not want to reveal any kind of commercial information, which, in its turn, may urge them (the partners) to opt out. This means a negative impact on capital mobilization and investor confidence. Apart from this, the recent amendments to the tax code concerning tax liens are very likely to further undermine business confidence.

What can justify increasing the state’s access to commercial information? Clearly, one of the arguments might be prevention of the economic crime (including money laundering) and terrorism. However, it is hard to determine which goal is more important – having liberal business environment or creating an additional mechanism aiming at preventing the economic crime. Apart from this, the Georgian legislation (the law on illegal income) sets out in detail what transactions have to be monitored or subject to the scrutiny by regulator(s).

We propose that:

• the National Bank and the Parliament of Georgia examine whether or not the possible effect of economic crime outweighs the effects of possible decrease in the business confidence. Such strict supervision may be justified if the former outweighs the latter. As far as we know, such examination has not as yet been attempted.
• the National Bank and the FMS detail how commercial banks and other players in the financial market should monitor attempts to conclude deals. This is the case when the provision in the law has to be matched up with a detailed technical description of applicable procedures in the bylaw(s).
• the law on Securities outline the framework within which the national Bank will be trading in gold exchange-traded products, while NBG regulations should detail major sets of terms and conditions that will apply to NBG’s trade in gold exchange-traded products as well as NBG’s discretion.