Adequately Managing Conflict of Interests and Related Party Transactions

1
Adequately Managing Conflict of Interests and
Related Party Transactions
May 23, 2006Yerevan
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Outline

• Objective
• To discuss the major issues of conflict of
  interests and ways of managing them.
• Structure
• Conflict of interests
• Related party transactions
• Conclusions

3
Takeaways
As a result of this training you will be able
to...

• better understand the problems of rise and
  disclosure of conflict of interests, related
  party transactions and beneficiary ownership
• know more about best international practice of
  managing these problems

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• 1. Conflict of Interests

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The concept of conflict of interests
1
Company officer
Personal interests
The banks interests
Independence objectivity of judgements
6
Initiators of conflict of interests
1

• Who can influence an officers commitment to
  companys interests

7
What interests can be?
1
Monetary
Non-Monetary

• financial
• other material benefits or expenses

• benefits which cannot be appraised

8
Situations of potential conflict of interests
1

• Business activity with kinsfolk
• Financial interest in another company
• Side work in another company
• Membership in governance bodies of another
  company
• Receiving gifts from third parties
• Receiving loans

9
How to manage the situations of potential
conflict of interests
1

• Try to avoid such situations
• Disclose information of existing and potential
  conflict of interests
• Oversee settlement and avoidance of conflict of
  interest

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What should a conscientous party of conflict of
interests do?
1

• Immideately disclose information
• Suspend any further activity
• Receive decision of the authorised officer
• Implement this decision

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Discussion 1
1

• How should an authorised officer act after
  receiving information about conflict of interests?

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1

• Work in groups

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Question 1-1
1

• One of your customers gives you rather an
  extravagant fruit and candy gift basket for a
  holiday. It does not seem like a big deal, but it
  is not what you would consider nominal.

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Should you keep it? It would seem rude to return
it.
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Question 1-2
1

• You are invited to an industry conference
  sponsored and paid for by one of your major
  clients. It will be held at a resort in Armenia.
  The purpose of the conference is to demonstrate
  the newest line of products
• and discuss industry trends.
• May you attend?

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Question 1-3
1

• Your brother is a current customer and is
  interested in a mortgage line. He qualifies under
  the banks standards and you would like to earn
  the bonus for opening the account.
• Is this acceptable?

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Question 1-4
1

• A valued customer of the bank, whose accounts you
  have handled for many years, wants to leave
  something in his will for your children. You know
  that you cannot accept these types of gifts, but
  since they are intended for your children, maybe
  it is OK?

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Question 1-5
1

• You occasionally help your children with their
  school fund-raising events by telling your
  co-workers about products they are selling. You
  are not pressuring co-workers to buy anything.
• Is this OK?

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• 2. Related party transactions

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Potentially interested persons
2
Members of the Board
Shareholders holding together with interrelated
parties particular of voting shares
Potentially interested persons
Members of the Management Board
Entities enabled to predetermine decisions
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Interested Persons OECD Principles
2

• Persons under common control
• Large shareholders including members of their
  families and business partners
• Top managers

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Related Parties IFRS (IAS 31)
2

• Have interests in joint ventures
• Are considered via three types of control
  control, considerable influence and joint control
• Jointly controlled operations, assets, entities
• Top managers, board members and family members
  are considered related parties
• Pension fund established in the interests of the
  banks employees or any legal entity related with
  the bank

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Approval of Interested Parties Transactions
2

• Transactions are approved
• Before their execution
• By board of directors or shareholders meeting
• Special rules apply

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Detection of Interested Parties Transactions,
2/1
2

• Each transaction should be properly approved
  before execution, but in practice the relevant
  rules sometimes cannot be applied because
• The board of directors and shareholders do not
  always know about participation of interested
  parties in a transaction
• Insiders conceal their concernment and interests
  in the transaction

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Detection of Interested Parties Transactions,
2/2
2

• The board of directors shall play a key role in
  detecting and disclosing information about
  interested parties transactions
• Keep records of interested parties and clarify
  their involvement in the transaction
• Materiality of such transactions
• Interest-free loans
• Sale of banks assets for transfer prices
• Transactions with payment in-kind
• Audit committee should cooperate with external
  auditor for detecting all interested parties
  transactions

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Disclosure of Beneficial Owners
2

• Disclosure of beneficial owners is crucial for
  detecting interested parties transactions.

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Who is a Beneficial Owner?
2

• A beneficial owner is a person who, directly or
  indirectly through agreements, contracts,
  relations or in any other way has solely or
  jointly
• The voting right (i.e. the right to vote or to
  give directions to vote)
• Investment authorities (i.e. the right to dispose
  or to give directions to dispose a security)
• The right on dividends

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Disclosure of Beneficial Ownership in EU, USA
and UK, 2/1
2

• For all companies which securities have been
  listed (USA, EU)
• For all public companies (UK)
• Requirements to disclose information about
  beneficial ownership of non-public companies can
  be included in internal codes of corporate
  governance

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Disclosure of Beneficial Ownership in EU, USA
and UK, 2/2
2

• Thresholds
• 5 of shares and further changes by every 1
  (USA)
• 5,10, 15, 20, 25, 30, 50, 75 (EU)
• 3 of shares and further changes by every 1 (UK)

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Discussion 2
2

• Is the existing legislation, which regulates
  interested parties transactions, flexible or
  strict enough to ensure the development of
  business and market in your country? What
  provisions hinder?

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Conclusions
3

• The most efficient way of managing conflict of
  interests is establishment of clear corporate
  procedures aiming at prevention of conflict of
  interests.
• Board of directors shall play a key role in
  detecting interested parties transactions and
  ensuring protection of interests of the bank and
  all its shareholders.
• Public disclosure of information about material
  interested parties transactions increases
  confidence of the market to banks.

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Contact details
IFC Yerevan 9 V. Sargssyan str. Yerevan 375010,
Armenia Tel [phone], 545242 Fax (37410)
545245