Inaction or criminal intent? How the National Securities and Stock Market Commission neglects the interests of Ukrainians in favor of a sanctioned Russian

Two years ago, Ukraine imposed sanctions against a Russian businessman with a Kazakh passport, Timur Turlov, and his brokerage company Freedom Finance Ukraine. The National Security and Defense Council restrictions have left thousands of the company's clients in limbo: all their assets are blocked.

The situation is complicated by the fact that thousands of Ukrainians bought war bonds of domestic government loans (OVGZ) and Eurobonds through Freedom Finance, which the government had recently restructured.

A year ago, EP wrote about Turlov’s business, sanctions against his Ukrainian company and billions of hryvnia, to which thousands of Freedom Finance clients lost access. During this time, the regulator - the National Commission for Securities and Stock Market (NCSM) - not only failed to return the invested funds to investors, but also did not see how the business of the sanctioned person continued to earn millions of hryvnia from Ukrainians during the great war.

Article 2 of the Law “On State Regulation of Capital Markets” imposes obligations on the National Securities and Stock Market Commission to protect the rights and interests of investors. This story is about how the commission neglects its duties in favor of the interests of a sanctioned Russian.

Sanctions that only work against Ukrainians

On October 19, 2022, the National Security and Defense Council (NSDC) imposed sanctions against a number of individuals associated with Russian aggression. In addition to the oligarchs close to the Kremlin, Turlov and Freedom Finance Ukraine fell out of favor with the Ukrainian authorities.

The sanctions blocked the activities of the company, in which 12.7 thousand Ukrainians opened accounts. The total value of the assets of these citizens then amounted to about UAH 3.5 billion, of which UAH 250 million were investments in domestic government loan bonds (OVGZ).

Ukrainian legislation clearly prohibits sanctioned persons from accessing the domestic securities market (CS). Consequently, the logical embodiment of the sanctions would be the loss of Freedom Finance’s licenses and the liquidation of the company with the return of funds from existing assets to clients. However, the National Securities and Stock Market Commission read the law in its own way and, instead of canceling licenses, decided to suspend them for the duration of the restrictions, that is, for five years.

Since then, Freedom Finance Ukraine clients have been in limbo. Due to the sanctions of the National Security and Defense Council and the suspension of licenses, they cannot withdraw funds from their accounts, receive interest from the state for purchased government bonds, receive money for their redemption, close accounts, or transfer securities to accounts in other depository institutions.

Clients nominally see the assets in their accounts in the broker's mobile application, but do not have access to the funds. These investors have been living in this state for two years now.

Meanwhile, the business of the sanctioned Turlov continues to operate successfully in Ukraine. The fact is that Freedom Finance Ukraine is only one of the companies of the international group Freedom Holding Corp. In addition to Ukraine, the holding operates in Kazakhstan, Cyprus, the USA and other jurisdictions.

Freedom Finance could open securities accounts for Ukrainian clients both in Ukraine and Cyprus with Freedom Finance Europe. The latter was not subject to the restrictions of the National Security and Defense Council or to the sanctions lists of any other country. Those who have opened accounts in this Cypriot subsidiary can freely dispose of their assets.

Freedom not only services accounts of Ukrainians in Cyprus, but also, despite the sanctions of the National Security and Defense Council, continues to operate in Ukraine and actively attracts new clients. To verify this, the EP journalist visited the Freedom Finance Ukraine branch located on Gonchara Street in Kyiv. Instead of the closed doors of a company that should not be working, he was met by employees of the Exchange University Training Center LLC (NTBU).

This company provides educational services and promises to teach the basics of securities trading in two weeks and 5-11 thousand UAH. According to YouControl, it is headed by the financial director of Freedom Finance Ukraine, Ruslan Ismailov. The owner of the company is Anastasia Ostretskaya, head of the marketing department of Freedom Finance Ukraine. The university itself was called “Freedom Finance Training Center” until December 2022.

NCBU employees told the journalist that the training program provides for opening securities accounts for clients in the Cypriot Freedom Finance Europe. Moreover, through the university you can open an account with a company even without having to take a training course. Its managers cooperate with Freedom Finance and, if necessary, provide them with contacts of new potential clients.

Thus, even after the imposition of sanctions, Turlova’s Freedom Finance continues to operate in Ukraine, attracts clients and makes money on operations, as before the NSDC decision. The only inconvenience is that client accounts opened with Freedom Finance Ukraine have been blocked, in particular the war bonds they purchased from the Ministry of Finance and other government securities.

In a conversation with the ED, members of the National Securities and Stock Market Commission Yuri Boyko and Yaroslav Shlyakhov said that the commission cannot influence Freedom Finance Europe and prohibit it, because this institution is registered in Cyprus. According to officials, they know nothing about the activities of the NCBU and its connection with the sanctioned company Freedom Finance Ukraine.

The EP also contacted Freedom Finance of Ukraine, where the National Securities and Stock Market Commission appointed a temporary director on June 11, 2024. They answered that they have no relation to the NCBU, although the institution operates in the Freedom Finance of Ukraine branch, its leaders are managers of the same broker, and its employees offer to open accounts with Freedom Finance.

NCBU is not the only trace of Turlov in the financial system of Ukraine. A year ago, EP wrote that he might also informally own Sky Bank. After all, it is in the building of this institution that the only Kiev branch of Freedom Finance of Ukraine, and now the National Central Bank of Ukraine, is located.

Turlov submitted documents to the National Bank several times to obtain permission to purchase this institution, but the banking regulator did not approve such an operation. Also, the Russian, through Freedom Finance Europe controlled by him, provided Sky Bank with $2 million and UAH 37 million in the form of subordinated debt.

According to the NBU, the ultimate beneficial owner of Sky Bank is a citizen of Kazakhstan, Arif Babayev. A year ago, the regulator reported that they did not consider Turlov to be the real owner of the bank. Since then, its formal owners in the National Bank’s reporting have not changed

ED's interlocutors in the stock and banking markets claim that Sky Bank is not only controlled by Turlov, but is also integrated into his brokerage business in Ukraine. In particular, it is in this bank that the cash balances of Freedom Finance Ukraine client accounts are stored: part of the funds from the redemption of government bonds, as well as interest income and redemptions of foreign and corporate bonds.

This may mean that while NSDC sanctions are in effect and clients cannot withdraw assets and funds from their accounts, the bank can use this liquidity to make money on investments in NBU certificates of deposit. Moreover, this is not a new scheme for Ukraine during the war.

ED interlocutors familiar with the asset structure of Freedom Finance Ukraine say that there are UAH 200-250 million of clients of the sanctioned broker in the Sky Bank accounts. For the bank, whose total assets on August 1 amounted to UAH 3.26 billion, this is a significant financial resource. According to the NBU, in 2023, Sky Bank earned UAH 217.9 million in interest income (net profit after tax - UAH 43.8 million).

Lobbying at the highest level

In March 2022, the SBU opened criminal proceedings under the article on the financing of actions committed with the aim of violently changing or overthrowing the constitutional order. Freedom Finance Ukraine and Sky Bank were involved in the case. The SBU suspected the broker of financing terrorism, concentrating government bonds in the hands of Russian investors and bringing Russian capital into Ukraine. The most interesting detail of the case is the probable connection between Freedom Finance and some Ukrainian officials.

“It was established that during the above period (2019-2022), the interests of Freedom Finance Ukraine LLC in the stock market of Ukraine were lobbied by officials of the National Securities Market Commission, who contributed to resolving any issues regarding the preservation of the licenses of the specified company, despite the latter’s violation of the requirements for licensing activities in the markets capital of Ukraine,” says the decision of the Shevchenko Court of Kyiv.

Until recently, the National Securities and Stock Market Commission “facilitated the resolution of any issues related to maintaining the license” of another Russian business, the Ukrainian Exchange. Turlov is the only person with a significant participation in the capital of the exchange. Him through the controlled Freedom Holding Corp. owns 24.26% of shares of the Ukrainian Exchange.

For a year and a half, the National Securities and Stock Market Commission did not notice that the co-owner of one of the three largest stock exchanges in the country was a sanctioned Russian businessman. Only after this situation was made public in March 2024, the commission “noticed” the trace of Turlov and the Ministry of Finance of the Russian Federation in the stock exchange and three months later revoked the license.

After the National Security and Defense Council imposed sanctions against Freedom Finance Ukraine, the commission spent three weeks thinking about their implementation. In the end, instead of revoking the license and starting the liquidation process, the broker decided to suspend the license for five years (the same period of time for sanctions). Such actions by the National Securities and Stock Market Commission only confirm the suspicions of the SBU that regulator officials can lobby the interests of Turlov’s business. Who exactly is doing this?

Several interlocutors of the ED in the stock market and in the banking sector claim that the Chairman of the National Securities Market Commission, Ruslan Magomedov, is familiar with Turlov. In particular, even before his appointment to the commission, the latter allegedly helped Freedom Finance enter the Ukrainian market. Moreover, in 2019, Magomedov tried to help Turlov obtain approval from the NBU for the purchase of Sky Bank. Obviously, these attempts were in vain.

The head of the National Securities and Stock Market Commission did not answer calls from the EP. As well as his revised questions about his potential connection with Turlov and the latter’s likely assistance in obtaining approval from the NBU for the purchase of Sky Bank.

The publication’s interlocutors at the National Securities Market Commission claim that after the sanctions were applied against Freedom Finance, the commission’s management sought their revision or cancellation. The commission members adhered to the same position in a conversation with an EP journalist in September 2023.

When this failed, the commission’s unofficial strategy with respect to the blocked assets of Ukrainian Freedom clients was to wait until the sanctions expired. Although this strategy works, the inaction of the National Securities and Stock Market Commission almost caused losses worth millions of hryvnia to some clients of the sanctioned broker.

From inaction to losses

In July 2024, the Ministry of Finance agreed with Eurobond holders on the terms of restructuring the external government debt. Investors agreed to write off part of Ukraine's debt. To do this, old Eurobonds were exchanged for securities of a new issue.

The restructuring took place in several stages. At the first, which lasted until August 23, investors could send their consent to the terms of the restructuring and receive a reward for this - 1.25% of the nominal value of their securities. At the second stage, old Eurobonds were exchanged for new ones free of charge.

Owners of Eurobonds are also among the clients of Freedom Finance Ukraine. After the introduction of sanctions against the broker, they lost access to these assets and any rights to dispose of them. In particular, they could not send their consent to the terms of the restructuring to the Ministry of Finance and receive an additional 1.25%.

The head of the initiative group of affected private clients of Freedom Finance Ukraine, Maxim Dybenko, told the EP that Ukrainian Eurobonds disappeared from the accounts of the broker’s clients, and new securities were not credited as a result of the restructuring.

The National Bank explained that it exchanged old Eurobonds for temporary ISIN codes, however, it is likely that the internal systems of Freedom Finance did not reflect these deposits in the clients’ personal accounts. According to the NBU, if the firm’s clients do not agree to exchange their Eurobonds as part of the restructuring, the state will seize these securities and exchange them for new ones, which it will sell on the market, and the resulting funds will be credited to the accounts of these clients.

Since the provision of consent to the restructuring remained prohibited due to the sanctions of the National Security and Defense Council, Freedom Finance clients risked losing not only the commission for consent, but also part of the face value of the new Eurobonds. The fact is that, most likely, their sale would take place at the market price. Now, according to Bloomberg, these securities are traded for 16-18% of their face value, that is, Freedom's clients could lose more than 80% of the value of their investments in Ukraine's external debt.

The decision of the National Securities and Stock Market Commission to allow them to agree to the terms of the restructuring could have protected them from potential losses. Until August 23, when clients could still receive a commission for consent, the National Securities and Stock Market Commission did not make this decision. Only after public criticism and accusations of inaction did the commission allow the firm’s clients to receive new Eurobonds on October 1st.

According to Dybenko, clients of Freedom Finance Ukraine held Eurobonds worth about UAH 800 million in their accounts. Consequently, the late issuance of a permit could cost them UAH 10 million. It is significant that investors whose Eurobonds were kept in the Cypriot Freedom Finance Europe did not have any problems during the restructuring of the Ukrainian government debt. Only clients of the broker, whose activities are regulated by the National Securities and Stock Market Commission, were affected.

Dybenko does not rule out that clients of Freedom Finance Ukraine will go to court to compensate for losses caused by the inaction of the National Securities and Stock Market Commission. This is not only about the lost opportunity to receive a commission, but also about the losses associated with the fact that their assets remain frozen for two years.

Light at the end of the tunnel

Boyko and Shlyakhov refused to provide any substantive answers to the questions of the EP journalist, which related to the activities of Freedom Finance Ukraine and the prospects for unblocking the accounts of its clients. The commission members could not explain why they made the decision so late to allow the company’s clients to receive new Eurobonds as part of the restructuring of government debt.

“Our principle is “not in word, but in deed.” We are not a body that boasts of promises. We do everything after the fact. We are not a political body, we are an independent regulator, we do not play politics,” Boyko noted.

Both members of the commission asked the ED not to publish an article about Freedom Finance Ukraine, because, according to them, an “information campaign” was being carried out against the regulator. They also stated that over the next few weeks, the actions of the National Securities and Stock Market Commission in relation to the clients of the sanctioned broker will become clear, as will the future of its clients.

Members of the commission hinted that the possible unblocking of the assets of Freedom Finance Ukraine clients lies not only within the authority of the National Securities and Stock Market Commission, but also largely depends on the state sanctions policy. The Commissioner of the President of Ukraine for sanctions, Vladislav Vlasyuk, told the EP that there would be no revision of restrictions either in relation to Freedom Finance Ukraine or in relation to Turlov in the near future.

As the ED learned, a significant part of the assets blocked in Freedom Finance accounts may belong to persons associated with Turlov. In addition, before the imposition of sanctions, the company produced various synthetic products based on Ukrainian government bonds. For example, it offered clients a product that allowed them to receive coupon payments on government bonds not once every six months, but monthly. Formally, such bonds were on the balance sheet of Freedom Finance Ukraine, and not its clients.

Now the task of the National Securities and Stock Market Commission and the temporary head of Freedom appointed by it is to audit the broker’s assets and accounts opened with it. According to ED sources in law enforcement agencies, the commission wants to involve the SBU in this audit. Probably to stall for time.

Clients of the Ukrainian Freedom Finance fear that behind the closed doors of the National Securities and Stock Market Commission there may be “another attempt to preserve Turlov’s business interests.” They informed the EP that their accounts could allegedly be transferred to the newly created Varto Broker company. According to YouControl, its founders are Freedom Finance Ukraine employees Vitaliy Bratoshek and Tatyana Novikova, and it is registered in the Kiev Unit city, where Freedom owns real estate.

Sources of the publication in the National Securities Market Commission confirmed that the Varto Broker company recently submitted documents to obtain the licenses necessary to operate on the stock market, but they expressed doubt that this particular company could be used to unfreeze the assets of Freedom Finance Ukraine.

While 12 thousand Ukrainians are waiting for the National Securities and Stock Market Commission to prove its ability to regulate the stock market “not in word, but in deed,” personnel are leaving the commission itself en masse. Magomedov and Shlyakhov are carrying out a reorganization in which its employees were offered to sign three-month contracts with no prospect of extension. Workers are losing benefits provided by the civil service, and some are losing mobilization reservations.

Due to mass layoffs, the leadership of the National Securities and Stock Market Commission prepared a letter to Prime Minister Denis Shmygal with a request to consider the possibility of introducing the body into a downtime, say the ED’s interlocutors in the commission and the Verkhovna Rada. It is expected that the National Commission will not work during downtime, but its employees, in particular management, will continue to receive two-thirds of their salaries.

How the market should work without a regulator is unknown. However, given how the regulator showed its “effectiveness” using the example of Freedom Finance, there is a high probability that the market will not feel its absence.