letters of credit and other commitments - and concluded that a provision of RUB 2 903 million was necessary as of 31 December 2013 (31 December 2012: RUB 2 284 million).
As of 31 December 2013 RUB 754 million of letters of credit were secured by customer funds (31 December 2012: RUB 2 226 million).
b) Operating lease obligations
In the normal course of business the Group enters into operating lease agreements for office equipment and branch facilities. Future minimum payments under non-cancellable operating leases are as follows:
31 December
2013
31 December 2012
Not later than 1 year 4 243 5 176
Later than 1 year and not later than 5 years 7 199 6 892
Later than 5 years 5 136 4 513
16 578 16 581
c) Fiduciary activities
In the normal course of its business the Group enters into agreements with clients to manage their assets with certain limited rights on decision making in accordance with specific criteria established by the clients. The Group may be liable for losses or actions aimed at appropriation of the clients’ funds until such funds or securities are returned to the client. The maximum potential financial risk at any given moment is equal to the amount of the clients’ funds and securities plus (minus) any unrealized gain (loss) on the positions. As of 31 December 2013 the total amount of funds accepted by the Group on behalf of its clients does not exceed RUB 15 505 million (31 December 2012: RUB 15 570 million). As of 31 December 2013 the total amount of securities accepted by the Group on behalf of its clients does not exceed RUB 61 015 million (31 December 2012: RUB 68 123 million). Assets accepted and liabilities incurred under the trustee and depository activities are not included in the Group’s financial statements.
d) Capital commitments
In the normal course of business the Group enters into various contracts for purchase of programming rights, property and equipment, construction and repair of buildings, with suppliers of consulting services and other services.
As of 31 December 2013 and 2012 the future contracted liabilities with respect to these contracts were budgeted by the Group are as follows.
31 December
2013
31 December 2012
Programming rights 18 961 19 461
Property, plant and equipment 4 064 2 564
Construction agreements 28 129 30 071
51 154 52 096
e) Environmental matters
The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group companies in the machinery and other business segments periodically evaluate their obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reasonably estimated. Under the current levels of enforcement of existing legislation, management believes that there are no probable liabilities for environmental damage which would have a materially adverse effect on the financial position or the operating results of the Group.
f) Social commitments
The companies in the machinery and other business segments have social commitments, which require them to contribute to the maintenance and upkeep of the local infrastructure and the welfare of its employees in the areas of its production operations. The commitments include contributions towards the construction, development and maintenance of housing, hospitals, transportation services, recreation and other social needs. Such funding is expensed as incurred.
g) Legal
In the ordinary course of business the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the operating results of the Group.
h) Insurance
The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its premises and equipment, business interruption, or third party liability in respect of property or environmental damage arising from accidents on the Group’s property or relating to operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on operations and financial position.
The Group has obtained an international comprehensive banking risk insurance policy (―BBB‖ – Bankers Blanket Bond) covering professional activities and crimes, including electronic and computer crimes. The amount of total insurance indemnity is limited to USD 100 000 thousand.
i) Taxation
The Group operates in a number of tax jurisdictions. In the normal course of business, management must interpret and apply existing legislation to transactions with third parties and its own activities. Current Russian tax legislation is principally based on the legal form in which transactions are documented and the underlying accounting treatment is applied as prescribed by Russian tax legislation.
The interpretation of Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future may focus less on the form and more on the substance of a transaction. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation. Tax years remain open to normal audit by the Russian tax authorities for three years; during such time any change in interpretation or practice, even if there is no change in Russian tax legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the Group operates are also changing, sometimes with retroactive effect.
Such uncertainty could, in particular, be attributed to tax treatment of financial instruments/derivatives and determination of market prices for transactions for transfer pricing purposes. It could also lead to temporary taxable differences occurring due to loan impairment allowance and profit tax liabilities being treated by the tax authorities as understatement of the tax base. Management is confident that applicable taxes have all been accrued and, consequently, creation of respective provisions is not required.
In management’s opinion, the Group is in substantial compliance with the tax and other laws governing its operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could take different positions with regard to interpretative issues or that court practice could develop adversely to positions taken by the Group and the effect on the financial position of the Group, should the authorities succeed in asserting their positions, could be significant.
Starting from 1 January 2012 new transfer pricing rules came into force in Russia. They provide the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions if their prices deviate from the market interval or profitability range. According to the provisions of transfer pricing rules, the taxpayer should sequentially apply five methods of market price determination prescribed by the Tax Code.
Transactions between individual entities within the Russian Federation are only subject to the transfer pricing legislation if the aggregate activity between two entities (determined on an arm's length basis) exceeds RUB 2 billion. Certain exemptions are available for transactions between two Russian related companies which are located in the same region. Controlled transactions between two individual entities, one within the Russian Federation and one in an overseas jurisdiction are only subject to the transfer pricing legislation if the aggregate activity between the two entities (determined based on arm’s length prices) exceeds RUB 80 million. The definition of a foreign entity includes a Russian branch or representative office of a foreign company.
Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the short period since the current Russian transfer pricing rules became effective, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.
NOTE 29–CORPORATE GOVERNANCE AND INTERNAL CONTROLS
The principal management bodies of the Bank are the General Shareholders’ Meeting, the Board of Directors, the Management Board and the Chairman of the Management Board. The Bank complies with corporate governance principles set forth in the September 1999 Basel Committee Recommendations on Enhancing Corporate Governance for Banking Organisations (recommended by the Central Bank of the Russian Federation for use by Russian lending organisations) and the Code of Corporate Governance (approved by the Russian Government in November 2001 and recommended for use by Russian joint-stock companies). In addition, the Bank has established a Corporate Governance and Remuneration Committee that is responsible for the supervision of compliance with international and Russian corporate governance principles, including transparency and management responsibility and accountability.
The Bank has the following committees:
Corporate Governance and Remuneration Committee Strategy Committee
Client Policy Committee
Asset and Liability Management Committee Technologies Committee
Investment Committee Credit Committee
Risk Management Committee.
The Board of Directors and the Management Board have responsibility for the development, implementation and maintenance of the Bank’s internal control system that is commensurate with the scale and nature of operations.
The purpose of internal control system is to ensure:
proper and comprehensive risk assessment and management
proper business, accounting and financial reporting functions, including proper authorization, processing and recording of transactions
compliance with laws and regulations.
Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank’s internal controls and periodically implements additional controls or modifies existing controls in accordance with changes in external and internal environment.
The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas:
requirements for appropriate segregation of duties, including the independent authorization of transactions
requirements for the recording, reconciliation and monitoring of transactions compliance with regulatory and other legal requirements
documentation of controls and procedures
requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified
requirements for the reporting of operational losses and proposed remedial action development of contingency plans
training and professional development ethical and business standards
risk mitigation, including insurance where it is effective.
There is a hierarchy of requirements for authorization of transactions depending on their size and complexity. A significant portion of operations are automated and the Bank has put in place a system of automated controls.
Compliance with the Bank’s standards is supported by a program of periodic reviews undertaken by the Internal Control Department. The Internal Control Department is independent from management and reports directly to the Board of Directors. The results of Internal Control Department reviews are discussed with relevant business process managers, with summaries submitted to the Audit Committee, the Board of Directors and senior management of the Bank. Internal control functions are performed by:
the Board of Directors and its committees, including the Audit committee the Chairman of the Management Board and the Management Board the Revision Commission
the Chief Accountant (and deputies)
Heads (and deputies) and Chief Accountants (and deputies) of branches the Internal Control Department
the Compliance Control Department
other business units and employees responsible for internal control execution in accordance with the established internal standards, policies and procedures, including:
the internal control function the risk management function
the security function, including IT-security the human resource function
the legal function
the compliance officer and the compliance function
the designated employee and division responsible for compliance with anti-money laundering requirements
the control officers of branches
professional securities market participant controller
other employees/business-units with control responsibilities.
Management believes that the Bank complies with the CBR requirements related to risk and capital management systems and internal control system, including requirements related to the internal control function, and that risk and capital management systems and internal control system are appropriate for the scale, nature and complexity of operations.