The activities of the National Bank of Georgia serve to maximize the protection of the interests of investors in the financial sector, which increases the sector’s appeal and market’s trust. The National Bank of Georgia mostly abstains from disclosing supervisory measures, however, the ongoing processes regarding TBC Bank’s founding shareholders revealed that the lack of information led to speculations and dissemination of false information. These actions affect both the trust in the financial sector and its reputation. Therefore, NBG has decided to provide additional information.
Based on the information provided by the Financial Monitoring Service of Georgia on August 7, 2018 concerning the transactions that took place in 2012, the National Bank of Georgia began the inspection process. The inspection revealed possible violations of the the legislation regulating conflicts of interests issues, which was later confirmed by the additional onsite study carried out by the National Bank of Georgia. Namely, the inspection uncovered that processes originated in 2007-2008, when Mamuka Khazaradze and Badri Japaridze, violating the legislation regulating conflicts of interests issues, took loans in the amount of USD 16.7 million from the bank via other legal entities (LTD "Samgori M" and LTD "Samgori Trade"). In December 2008, the whole amount was written off and the bank’s annual profit was respectively reduced by USD 16.7 million. Furthermore, no actions were implemented for appropriation of real estate used as a collateral.
It is worth mentioning, that in August 2008 thematic inspection was carried out to study the quality of TBC Bank’s credit portfolio. Due to its thematic nature,, the inspection did not envisage the identification of violation of the legislation regulating conflicts of interests issues. Since the transactions were executed via the aforementioned companies, the administrators’ participation was not directly visible. Consequently, during this inspection the aforementioned violation had not been detected. Additionally, the loans were written off in an accelerated manner, thus excluding them from further NBG inspection fields, including the area of conflict of interests. TBC Bank went through detailed audit prior to placement on the London Stock Exchange. However, since the aforementioned 2008 loans had long been written off, their detection via the named audit was highly unlikely. Therefore, the information that the transactions had been previously discovered, or that the bank was already penalized regarding the aforementioned case is false. Additionally, we would like to clarify that the supervisory framework of the National Bank of Georgia is not constrained by statute of limitations.
The high risk of the conflict of interests related to the founding administrators’ businesses has been permanently on the radar of the National Bank of Georgia. In the years 2014-2017, in order to reduce the risks of conflict of interests, the NBG consistently tried to improve the quality of the bank’s corporate governance. Its importance, along with other subjects, was underscored in February 2018’s letter of General Risk Assessment Program (attached), which sets additional capital requirements for the bank.
As a result of the inspection of September 2018, (related to the transactions that took place in 2007-2008) violations of the legislation regulating conflicts of interests issues by the Chairman of the Supervisory Board and his deputy, have been identified by the National Bank within the frameworks of its mandate and legislation. The severity of violations obligated the NBG to take relevant measures. Namely, according to the National Bank’s Financial Sector Supervisory Committee decision of November 19, 2018:
TBC Bank was prohibited to issue new loans and guarantees to Mamuka Khazaradze and Badri Japaridze, as well as to persons related to them;
Independent members of TBC Bank’s Supervisory board were given 2 month notice, to present their position regarding the banks administrator’s violation of law;
TBC Bank was charged a fine of 1.1 Million Georgian Lari;
In spite of the request of the National bank and the 2-month term given, the TBC Bank’s supervisory board’s response did not meet the NBG expectations. On February 13, 2019, after the discussion at the Financial Sector Supervision Committee, the NBG demanded that the relevant governing body of the TBC Bank’s: a) to recall the Chairman of the Supervisory Board and Deputy from the supervisory board; b) to add two new members nominated by the minority shareholders.
It should herewith be clarified that the decision of the National Bank does not apply to the presence of the mentioned persons in the superior body TBC BANK GROUP PLC (100 % owner of TBC Bank in London) or their shares in the TBC Bank. The abovementioned supervisory measures will improve the bank’s corporate management.
We would like to underline that the supervisory measures taken by the National Bank on February 13, 2019, do not apply directly to the TBC Bank. These measures are directed at improving the structure of the bank’s governance and preventing concentration of influence of one or two person’s on the board.
TBC Bank is a systemically important bank. Therefore, it is very important for the financial stability of the country that the corporate management structure of the bank and the conflict of interests policy are in full compliance with the requirements for the large financial institution. The National Bank, in accordance with the legislation and international norms, was obliged to take adequate measures in response of corporate management problems and violations of the certain regulatory norms at the systematically important bank. We would like to remind you that it is because of the scrupulous supervision of the NBG, the Georgian banking system has become one of the most successful in the region. As a result of uncompromising banking supervision, the shares of two large banking institutions of the country are listed on the international market and enjoy high confidence of Investors. Any kind of weakening of the supervisory principles or the deliberate discrediting of the National Bank, will damage the financial sector and the country as a whole gained via its positioning on the international market, which will not be tolerated by the NBG.
The National Bank of Georgia is an independent institution. The regulator’s responsibility is to take necessary and sometimes complicated and unpopular measures in order to reduce the risks within the system. Despite the interests of the different groups, the NBG, within the scope of its financial stability mandate, will continue the implementation of all supervisory measures that are necessary for functioning of sustainable financial system.