Comments made by lawyer Azamat Khagov in an article titled “Cooperators are searching for “participants””

5 March 2012
New money takeoff methods emerge in the market, including those involving legal forms of business activity - microfinance organizations, credit unions, digital wallets, etc.

Banks will not insure against swindlers

In the end of February some banks (including government-sponsored banks) faced “innovation” technologies used by swindlers. The fraud scheme is very simple: the so called “foremen” of financial pyramids open personal accounts in well-established banks, then they promise fantastic interest rates to potential customers, declaring that deposits are guaranteed by the state (as bank deposits).

“Neither the size of a bank, nor its status as a government-sponsored institution can guarantee the integrity of an individual engaged in manipulations with moneys of deceivable citizens via accounts in this financial institution,” said Sergei Kulpin, manager of a VTB 24 branch. “What I hate the most about the situation, is that socially unprotected groups of people, chiefly retirees, are easily deceived by advertisement of such ‘financial services’”.

Credit organizations are helpless in the matter. According to Vladimir Dzhikovich, President of the North-West Commercial Banks’ Association, banks are not entitled to block accounts of citizens suspected of organizing “pyramids”, or to limit transfers to such accounts.

“However, banks understand that no revenues from servicing such accounts will cover potential reputation risks, that’s why they use economical levers. For instance, they limit withdrawable amounts or establish big commission fees for large amounts. Moreover, Rosfinmonitoring is notified of suspicious operations worth over 600 thousand roubles,” said Dzhikovich.

Virtual credit

A person who lost their savings to a “pyramid builder” may hope to compensate for the lost money through court action (banks carry out identification of recipient when opening an account), while players of the online credit market will hardly get a line on the person they confided their money.

For instance, a popular WebMoney system involves settlement in the so called “property rights” (WMR-roubles). The system is not liable for recipients’ activities; moreover, it does not even undertake to identify participants.

“It may happen that citizens, involved into financial pyramids using transboundary features in the Web, will be excluded from legal terrain of Russia,” said Kirill Saskov of Kachkin & Partners. “Contractor may well be located outside the RF territory, which makes it difficult to file claims with a Russian court”.

Azamat Khagov, a lawyer of S&K Vertical, believes that any conflicts arising between “virtual” depositors and borrowers should be resolved by an almost virtual court. “Every individual registered with WebMoney agrees that all disputes arising between participants during the use of WebMoney services shall be resolved by Arbitration Service of Webmoney Transfer System”, said the lawyer.

Operation “Cooperation”

The founders of notorious “МММ 2011” even do not conceal that their project is a pyramid, while representatives of new cooperative movement try to convince potential clients that there is nothing wrong with their activity.

The existence of credit unions is permitted by law; however, they should pursue absolutely different objectives. “Credit union is a form of business activity, which is necessary for the market and oftentimes very efficient,” said Vladimir Dzhikovich. “Credit unions exist throughout the world, and, among other, are used for reciprocal lending by citizens of small towns or villages which know each other very well (it is a kind of “mutual benefit societies”). Such mutual control is a kind of guarantee, which allows abandoning excessive state control. In turn, this allows decreasing the margin and, consequently, to raise funds of shareholders at interest rates higher than those offered by banks and to grant loans at interest rates that are lower than those offered by banks. However, in Russia credit unions often disguise shady structures which advertise investment at fantastic interests among deceivable individuals, while the further use of these monies may be unclear. These dupable individuals are not protected by the Deposit Insurance Law, and therefore they may lose the invested funds at any time”.

“The Federal Service on Financial Markets (FFMS) adheres to the same position. “We categorize cooperatives in two nominal groups,” said Menke Koneev, adviser to the Head of Regional Department of the Federal Service for Financial Markets in the Northwest Federal Region. “Those in the first group are based on the industry or profession of members; such cooperatives are similar to “mutual benefit societies” in labor collectives. Such societies are associations of like-minded persons who know each other. These cooperatives are not driven by numbers and do not publish ads in newspapers. The second type of cooperatives are credit unions which promise big interests (significantly greater than those offered by banks) via mass media and pasted notices. And deceivable persons swallow the bait. Of course, such services involve risks”.

No big scandals were reported involving cheated investors of credit unions. And petty scandals will hardly go public: there is no agency for victims to complain to, and it is useless to take legal recourse. The point is, people who gave their savings to cooperators are members of the same cooperative; formally, they are co-partners in a financial structure.

State authorities (the Federal Service on Financial Markets, FFMS) supervise only cooperatives with more than five thousand members, while the others are “under the umbrella” of so called self-regulatory organizations (SROs).

“Much advertised credit unions (including those pasting their ads in metro stations and on power transmission poles) work illegally,” said Andrei Zaostrovtcev, professor of St. Petersburg National Research University Higher School of Economics (HSE). “As for me, I would not commit money to them, because their activities are on the verge of fraud. Any financial services necessitate licensing, and credit unions have no licenses”.

Yevgeny Virekhovsky, director of SRO Soyuz Mikrofinans, disagreed with representatives of banks, FFMS and experts: “Currently we supervise activity of credit unions. As with banks, reliability of a credit union (as a financial institution) is assessed via eight reliability indexes, including the amount of money arriving in an account of a member/group of members. Moreover, we developed the borrowed funds insurance system for the funds borrowed from citizens, similar to the bank system: investors can obtain an insurance policy. Therefore it would be incorrect to call us “pyramids”.

This being said, today policies are offered by only 3 of 155 SRO members, these policies are issued by private insurance company not protected in case of bankruptcy, and do not exceed 400 thousand roubles. Other “mutual benefit societies” keep advertising their “profitable deposits” and keep collecting people’s savings without issuing any insurance policies, and Yevgeny Virekhovsky sees nothing wrong with such activities.

... Experience shows poor reliability of housing saving co-operatives (HSC) – over the last years, several entities “offering a convenient method to solve housing problems” disappeared with money of their members, while four of five HSCs registered in St. Petersburg are in the process of winding up.

Pavel Netupsky

Baltic Information Agency

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