RS Brief news Foreign banks now allowed to operate without intermediaries

Foreign banks now allowed to operate without intermediaries

June 2012

The Supreme Arbitration Court of the Russian Federation refused to examine the case regarding foreign banks operating on the Russian market through intermediaries (non-banking companies). This matter mostly concerns banking companies from the Baltic States (Latvia, Lithuania, and Estonia) whose legislation allows banks to raise depositors’ funds without their actually being in the bank’s office. Taking advantage of this opportunity, foreign banks operated on the Russian market not through branch offices or subsidiary banks, but rather through regular firms that did not have a banking licence. This allowed banks to significantly decrease their expenses on conducting business and get rid of administrative control from the Central Bank of Russia. However, this way of conducting business indirectly contradicted the very instructions of the Central Bank which insisted upon regulating these ‘unlicensed’ intermediaries in one way or another. Interestingly enough, the Central Bank was not the one to take this matter to court, but rather the companies putting money on the deposit accounts of the banks of such intermediaries and then in turn not receiving these funds when one of the banks that went bankrupt took a legal action. These companies, following the Central Bank of Russia’s lead, insisted that since they deposited these funds through an intermediary working in Russia, then Russian legal practices should be applied for returning this money. It is worth noting that this also meant that the Bank of Russia could heftily fine these intermediaries, while their way of conducting business would be considered illegal.

The Presidium of the Supreme Arbitration Court of Russia examined all these arguments and ruled that this matter does not fall under its jurisdiction since all disputes regarding deposits in foreign banks which do not have official branches and subsidiary companies in Russia are to be considered in a court of the country where the bank is located. Therefore, the Russian arbitration decided not to forbid such business practices, but merely pointed out that depositors face certain risks. RS