TBILISI, DFWatch – A new report shows that legislative changes ushered in by the Georgian government to counter the influence of an opposition billionaire has hampered the bank sector.

The report shows that new legislation about banks, tax and the executive made at the end of 2011 and the beginning of 2012 has had a negative effect on the functioning of Georgia’s bank and finance sector, as well as the activity of banks in the country.

Revaz Sakevarishvili, economic analyst at Econometri, presented a report describing the details about the influences of legislative amendments implemented in Georgia during the last nine months.

Nine months ago, Georgia’s richest, Bidzina Ivanishvili, decided to go into politics, promising to change the government through elections. One of the main threats to the current government occurred to be the businessman’s huge wealth and possibility to finance various political subjects and activity.

Since December 2011, the Georgian parliament started implementing a whole number of legislative amendments. First of all, the election legislation was completely amended, as well as legislation on bank and financing sector, including procedures of bank activities. All these are directed to maximally restrict Ivanishvili from getting involved in political processes and financing them.

The report says that among those changes there also was a temporary amendment which came into force for a while to destroy one certain bank, and after that was accomplished, the legislation returned to its previous form.

Cartu Bank is considered to be a bank belonging to Ivanishvili. As soon as the businessman released an open letter describing his political goals, the bank was attacked. First it was accused of money laundering, then accused in different illegal activities. Its shares were seized for a while, the board of directors was fired, together with other employees, and when the government let go of its control over the bank, and owner regained control, they discovered that agreements had been signed with companies, which may lead to liquidity problems for the bank.

Another important problem caused by legislative changes is that confidential information, which is kept in banks, is no longer confidential. The law defined what a ‘politically active person or persons in direct relation with them’ means, which is that institutions implementing any of these persons’ financial activities are now obliged to give away personal information, otherwise there, are sanctions.

The National Bank of Georgia signed memorandum with the Chamber of Control, now known as the State Audit Service, on the basis of which a bank’s confidential information about its clients is accessible. The State Audit Service is a government body, the authority of which was expended on the basis of recent legislative changes. The Audit Service has authority to track the financial operations of political parties, subjects, legal and individuals related to them, to fine them or to make a decision to seize their property and bank accounts.

On the grounds of the memorandum, information about all financial transactions belonging to the National Bank from November 1, 2011, is shared with the State Audit Service. DF Watch has reported on a number of cases where people have been fined and their property seized by the audit service. These cases have mostly been fought against companies or indicituals that were supporters of the Georgian Dream coalition, but also other opposition political parties.

“This memorandum in fact completely ignores concept of bank secret, which is in detail described in the law about commercial bank activity,” the report says.

Georgia, which claims to have the simplest system of making business and business-finance activities, made it complicated for financial institutes to conduct their services. Institutes like commercial banks, microfinance organizations, money transfer organizations, exchange services and others now are subject to additional bureaucratic procedures, which includes the checking and rechecking of information about their clients, defining suspicious actions of people, which may be related to selling or purchasing property, receiving large amounts of money, management of assets, registering, selling or purchasing legal persons, and other things.

“Each of these institutes are obliged to define a politically active person or persons who are in direct relation with them, to study the origins of their money or financial institutes and permanently monitor these issues,” Revaz Sakevarishvili writes in his report.

Those institutes have to gather all information about such clients, define suspicious deals by undefined criteria.

“Accordingly, financial institutions are in fact granted unlimited authority to restrict clients and their rights based on their own views and according to undefined criteria.”

The most important amendment concerns the rule of a person’s obligations to a bank and revenue services. If tax lien is implemented in earlier period than bank lien, by the new law, first the tax lien should be satisfied and then the demand of commercial banks. Before, first bank liabilities were satisfied and then tax liabilities.

A bank had an opportunity to check a client’s ability to handle mortgage or pledge and then give credit. But now it is impossible to define in which cases there will be tax liabilities primary, and than bank demands.

There was only one bank reporting about problems created by the new law. It was Cartu Bank, which claimed that in a majority of cases, there were registered tax liabilities being prior to bank liabilities among their clients.

These regulations were valid exactly for six months. Afterwards, the legislation returned to its earlier form, defining that in such cases, bank demands should be satisfied first.

But the six months period seriously affected Cartu Bank only, while other banks did not report any problems related to the temporary legislation.