Turkey: Memorandum On Amendments In The Banks Law Made By The Law 5020

I. SUBJECT

II. AMENDMENTS IN VARIOUS LAWS

1. Paragraph Added To Civil and Criminal Procedures Laws

2. Duty Assigned To The Office of Senior Legal Advisor and The General Directorate of Litigations of The Ministry of Finance

3. Provision on Assignment of a Specialized Chamber in The State Council

4. Obligation and Liability to Give Information to Public Authorities

5. Items Incorporated in "Black Money"

III. AMENDMENTS IN THE BANKS LAW

1. Documents Exempted From Fiscal Liabilities

2. Change in Legal Status of Saving Deposits Insurance Fund

3. Powers of Directors Appointed by The Fund

4. Continuity in Legal Proceedings

5. Some Items Which Are Automatically Converted Into "Treasury Receivables"

6. Provision on Burden of Proof

7. Some Important Provisions of Supplementary Articles

The "Law Amending the Banks Law and Some Other Laws", no. 5020, adopted and enacted by the Turkish Grand National Assembly on 12 December 2003 and published in the Official Gazette on 26.12.2003, mainly contains new provisions for facilitating the collection of receivables from customers and owners of the banks which have become insolvent and have been transferred to the Saving Deposits Insurance Fund or of which banking license has been withdrawn.

In this Memorandum, we are going to brief the reader about the amendments in various laws and the additions to the Banks Law.

A paragraph is added to each of article 286 of the Turkish Civil Procedures Law and article 76 of the Turkish Criminal Procedures Law, and pursuant to such paragraph, with a view to assuring neutrality in expert reports, if, in the opinion of the Court, there are strong signs and doubts that the expert report is not based on the factual events and realities, without prejudice to the civil and criminal liabilities arising out of the applicable laws, a certified copy of the case file may be sent to the Office of Public Prosecutor for commencement of a criminal lawsuit against the experts pursuant to and under the provisions of the Law no. 3628 on Declaration of Properties and Prevention of Bribery and Corruption.

Furthermore, the provisions of the Law on Trial of Civil Servants and Other Public Officers will NOT BE APPLIED on the suspects accused of (i) the offences described in the Law on Declaration of Properties and Prevention of Bribery and Corruption or in the Banks Law, or (ii) the extortion, bribery, peculation, simple and qualified embezzlement, smuggling during or for performance of job, or fraudulency in official bid tenders and trading deals, or (iii) the offences of disclosing or causing disclosure of secrets of the State, or (iv) on the accomplices of such offences. Thus, trials for such offences are speeded up and simplified by elimination of any prior consent of the higher public authorities.

By a paragraph added to article (9/1-b) of the Law, all "properties, receivables, interests, revenues, earnings and expenditures" that are inaccurately and untruly declared by those who are under obligation to declare their personal properties are also considered as "unjust enrichment", subject to proof of the contrary. This provision is applicable also for the banks confiscated previously by the Fund.

The Law entrusts the General Directorate of Litigations of the Ministry of Finance with the task of following up and handling the offences listed in article 17/1 of the Law on Declaration of Properties and Prevention of Bribery and Corruption, which are related to the public administrations covered by the national budget, and which are considered as Treasury Receivables.

The 10^th Chamber of the State Council is appointed as the specialized chamber for resolution of disputes arising out of and in connection with:

• the Legislation on Protection of Value of Turkish Currency; and

• the Banks Law; and

• the Capital Markets Law.

Even if provided otherwise in the relevant special laws,

• the relevant Natural or Legal Persons, and

• the public entities and administrations

are obliged to GIVE COMPLETELY and in a reasonable time WITHOUT DELAY all kinds of information that may be REQUESTED by:

- the authority in charge of investigation and prosecution; or

- the Office of Senior Legal Advisor and the General Directorate of Litigations of the Ministry of Finance or their representatives, or

- other authorities named in the Law no. 3628

pursuant to and in accordance with the provisions of the Law on Declaration of Properties and Prevention of Bribery and Corruption.

According to the provision added to the Banks Law as article 22/4 by the Law no. 5020:

if and when the NATURAL PERSON partners who hold the control of management and supervision, de jure or DE FACTO, irrespective of being a director or executive or not, of:

- the banks of which shareholding rights and control of management and supervision are transferred to the Fund and/or of which license and power of "banking transactions" and "collection of deposits" are withdrawn and cancelled, and

- the banks of which liquidation process is commenced or conducted by or through the Fund,

cause LOSS to the Bank and increase in their personal properties or in the properties of others in any manner whatsoever, as a result of the acts listed in article (15/a), by directly or indirectly using or causing others use the sources of the bank to such extent to endanger the SAFE (secure) operation of the bank [Note: according to article (15/a), ALL of the bank sources used in favor and in interests of the PARTNERS who directly or indirectly hold the control of management and supervision of such banks, and all bank sources transferred to others locally or abroad, and all credit facilities made available to and all collusive transfers and assignment to their spouse and children, and pledges and mortgages established in favor of third persons, and all transfers of funds to the authorized signatories of the bank are treated and considered as TREASURY RECEIVABLES], such acts will be accepted and treated as EMBEZZLEMENT¹, and will be punished by IMPRISONMENT FOR TEN YEARS TO TWENTY YEARS and heavy fine of 20 to 80 billion TL.

The provisions of article (5.1) are applicable also on the banks which have been confiscated previously by the Fund, pursuant to Temporary Article 3 of the Law.

The following offences mentioned in sub-paragraph (A) of first paragraph of article 47 of the Law no. 2499 are also covered by the concept of "Prevention of Black Money Laundering":

• "insider trading", mentioned in article 47/A-1;
• "artificial pricing" or manipulation, mentioned in article 47/A-2;
• affecting the value of capital market instruments by providing "untrue, inaccurate, misleading or ungrounded information", mentioned in article 47/A- 3;
• "unauthorized stock issue or public offering and other capital market activities", mentioned in article 47/A-4;
• "use, in violation of the Law, of capital market instruments and other properties entrusted to the capital market institutions", mentioned in article 47/A-5;
• "reduction of profits or properties through hidden transactions", mentioned in article 47/A-6; and
• "sale of capital market instrument with uncovered repurchase promise", mentioned in article 47/A-7.

Provision of private interests, as defined in article 333 of the Execution and Bankruptcy Code, in the course of bankruptcy and concordat proceedings of the banks that are transferred to the Fund or are being Liquidated by the Fund, is also incorporated in the definition of "black money". Though being an offence prosecuted upon complaint, definition of this offence as a "black money laundering" offence is an indication of the importance attached by the Law to collection of the bank receivables.

According to the provision added to article 14(c) of the Banks Law, all contracts, documents and other papers issued with respect to the transactions relating to the banks transferred to the Fund, and all documents and/or other papers issued for amendment, renewal, extension of term, or transfer or assignment of the aforementioned contracts, documents and papers, or for restructuring of debt payments in a new redemption plan, securitization of receivables, transfer and assignment of debt guarantees, release of and/or settlement between the sides, and/or other related transactions under any name whatsoever, are exempted from all kinds of taxes, duties, imposts and other fiscal liabilities specified and stipulated in the special laws.

Pursuant to article 15/1 of the Banks Law, the Fund is a public legal entity. By the amendment Law no. 5020, the Fund Board is reorganized as an "independent higher board or committee"² The Fund will enact by publishing in the Official Gazette all of its Regulations and communiqués, being "regulatory acts" of it.

According to some "paragraphs" added to article (15/7-b) of the Law, which are applicable also on the already confiscated banks pursuant to Temporary Article 3:

The Fund may appoint new directors to the companies under its management and supervision, and such directors are authorized to sell the capital shares of the companies and/or their assets proportional to the said shares and to apply the proceeds of sale to the Fund’s receivables. This power also extends to an extraordinary right of not being bound by the legal obligations required to be fulfilled if and when half or 2/3^rd of the share capital is lost, as stipulated and envisaged in article 324 "insolvency of companies" of the Turkish Commercial Code. Thus, these new directors will not be held liable even if they fail to report to the competent court the loss of capital or the insolvency of company, and cannot be dismissed by a decision of the general assembly of shareholders, and even if they are not released, a "personal liability lawsuit" cannot be commenced against them, at any time after their assignment period or periods.

Moneys and all kinds of properties, interests and receivables acquired, after drawdown of the first credit or bank source, by a natural or legal person who is indebted to the Fund due to use of sources of a bank transferred to the Fund or in liquidation process by using the sources of banks transferred to the Fund, and/or acquired by third persons through such natural or legal person will be considered and treated to have been "acquired by use of the bank sources". Sale or assignment of properties acquired as above to third persons is not claimable against the Fund.

Third persons who are a party to assignments or similar other transactions effected "prior to transfer of the bank to the Fund" are under burden of proof of their GOOD FAITH therein.

Article 15/7-a provides that the Fund is authorized to take over control of management and supervision of the companies, and shareholding rights, except for dividends, associated to all and/or some of the capital shares held in the companies by:

• the subsidiaries under management and supervision of a bank of which shares are fully or partially transferred to the Fund, and
• the legal entity shareholders which directly or indirectly, alone or jointly, hold and control the management and supervision of that bank, and
• the companies of which management and supervision are controlled and held directly or indirectly, alone or jointly, by the natural or legal person shareholders of that bank.

The credits extended and made available to: (i) the companies where the aforementioned natural or legal persons or their employees or servants are a founder, partner, director or auditor, or (ii) the natural or legal persons representing the aforementioned persons in proxy, as trade representative or trade agent, or as representative without a power of attorney, or (iii) the natural or legal persons who transfer such credits or other bank sources to the aforementioned persons or to the persons holding the control of management and supervision of the bank:

• without security or

• with inadequate security

in violation of the banking laws and regulations and/ or banking customs and usage, by using the same address and by incorporating in the agreements some certain clauses such as transfer or assignment of debt or the right of renunciation, are also considered and treated as the bank sources utilized and disbursed by the partners holding the control of management and supervision of the bank.

"None of the objections or pleas" made by the borrowers of the Fund suspends and stops the legal proceedings, except for the sales.

Out of the Fund's receivables:

i) ALL KINDS OF BANK SOURCES utilized in their own interests by the PARTNERS who directly or indirectly hold the control of management and supervision of the banks against which legal proceedings are started by the Fund; and

- the bank sources transferred to the local or foreign companies, financial institutions and off-shore banks owned by such partners, under any name whatsoever; and

- the credits made available to the spouse, children and foster children of the said persons, and their other blood relatives and relatives by marriage; and

ii) all kinds of funds and sources transferred to the said persons, and all kinds of transfers and assignments made COLLUSIVELY and at a price "below the current market price" to:

• the dominating majority shareholders of the bank, or

• their companies, or

• the subsidiaries and affiliates of such companies; and

iii) all kinds of PLEDGES, CHATTEL MORTGAGES and REAL ESTATE MORTGAGES and other limited encumbrances established in favor of third parties, and proceeds and profits thereof; and

iv) "back-to-back" credits made available and extended between the subsidiaries, affiliates and PARTNERS of the same bank, and likewise, "back-to-back" credits made available and extended between the banks; and

v) proceeds of sale of all kinds of properties, shares, goods and services to the bank or its group companies at excessive and exorbitant prices; and

vi) sources and services transferred through long-term lease or financial lease; and

vii) credits made available and extended to the companies, which do not have adequate commercial operations, and are founded solely for transfer of sources while the bank's management or supervision is under control of the said persons, and proceeds of leases and service fees transferred to them; and

viii) ALL KINDS OF SOURCES transferred through fiduciary deals and transactions with the foreign banks and financial institutions; and

ix) deposits held by the bank with the off-shore banks and paid under court judgments, and off-shore deposits transferred by the off-shore banks to the bank with or without authorization; and

x) ALL KINDS OF SOURCES transferred to:

• the chairmen and members of the board of directors and the credit committee, general manager, deputy general managers, authorized signatories and managers of the bank; or

• their spouse; or

• their children; or

• their foster children; or

• their blood relatives or relatives by marriage

will WITHOUT ANY FURTHER TRANSACTION be considered and treated as "Treasury Receivables" and may thus be claimed and collected by the Treasury Lawyers.

The Law has brought an exception to the provision relating to automatic conversion into Treasury Receivables. Pursuant to this exception, the automatic conversion into Treasury Receivables is not applicable on:

• minority shareholders trading in the exchange; and

• members of board of directors or board of auditors who are liable to hold capital shares below 1% pursuant to the Turkish Commercial Code and special laws,

providing, however, that they are acting IN GOOD FAITH.

Thus, the Law has appropriately envisaged a protective clause for the members of board of directors or board of auditors of a bank appointed solely for their technical know-how, providing that they act in good faith.

These provisions are applicable also on the banks that are already confiscated by the Fund, pursuant to Temporary Article 3 of the Law.

The general rule of law, i.e. "one who pleads or claims is under burden of proof of his plea or claim", is somewhat changed for a special circumstance in the new article (17/a) of the Banks Law amended and revised by the Law no. 5020. Accordingly, in the PERSONAL LIABILITY LAWSUITS which are DIRECTLY brought forward by the banks transferred to and liquidated by the Fund against their FORMER DIRECTORS AND AUDITORS, or which are followed up by them as and in the capacity of the transferee or assignee, the burden of proof lies with the DEFENDANTS. This provision is applicable also on the banks that are already confiscated by the Fund, pursuant to Temporary Article 3 of the Law.

Portion under saving deposits insurance cover of the saving deposit accounts which are held with the banks transferred to and liquidated by the Fund and are undoubtedly proven to be true will be paid by the Fund in accordance with the principles to be determined by the Council of Ministers.

In the case of a difference or discrepancy between the amount of saving deposits under insurance cover, declared by the authorities, and the amount thereof determined by the Fund, the Law allows freezing of all and any bank accounts of the directors and partners of the bank and their spouse and children, and repeal of their rights of disposition on all kinds of properties, and deposit of such funds and properties in a place of custody, and other injunctions specifically listed in the Law, and such decisions may be taken by the judge of the Criminal Court of Peace having jurisdiction in venue in the location of the bank head offices. Similar provisions are stipulated also for the divorced and widow.

One who demands payment of saving deposits to him or to another person by submitting and filing false documents may be sentenced to imprisonment of 4 years to 8 years. If such fraud is detected after the payment is made, in addition, a heavy fine equal to 10 times the amount paid as above will be levied and imposed.

Contracts and agreements of pledge, mortgage, construction rights, rights of usufruct and habitation, and ordinary lease and rent contracts, and satellite, TV, trademark use, pension, insurance and ATM card contracts, and letters of guarantee, acceptance credits and endorsements and similar other transactions, listed in the Law, between:

• dominating majority partners,

• members of the board of directors,

• general manager,

• deputy general managers, and

• their spouse, children and foster children, and

• their blood relatives and relatives by marriage, and

• authorized signatories and duly authorized officers

of the banks which are transferred to or confiscated by the Fund WILL BE DEEMED AND TREATED AS INVALID. This provision is applicable also on the banks that are already confiscated and are being liquidated by the Fund, pursuant to Temporary Article 3 of the Law.

Prescription time in the law suits and legal proceedings with respect to the Treasury Receivables is 20 years.

The Law provisions pertaining to "injunctions", "legal proceedings" and "collections" with respect to the Fund and Treasury Receivables are applicable also by the state-owned banks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.