DFSA Latest Developments

Includes:

  • DFSA Amendments to Legislation
  • DFSA Consultation Paper No. 105
  • DFSA Legislative Summary
DFSA Amendments to Legislation

Following the end of the period of comment for Consultation Paper 104, the Dubai Financial Services Authority (DFSA) has issued a number of legislative amendment notices which affect several Rulebooks. The changes will come into effect on 3rd April 2016. Some of the changes include:

Changes to GEN Module
Under the DFSA regime to date, there is no indication on the Licence of an Authorised Firm, or on the Public Register, that a Firm is allowed to hold or control Client Assets or to hold Insurance Monies. The DFSA will soon be introducing a “Hold or Control Client Assets/Insurance Monies Endorsement” which can be added to a Firm’s license. To be able to obtain such an endorsement, a Firm would need to demonstrate to the DFSA that it is able to meet, on an ongoing basis, the requirements relating to the holding of client assets or insurance monies as applicable.

The application for such an endorsement will cost USD 5,000 but Firms already undertaking the activity do not need to go through the formal application process. Instead, these Firms are able to self-certify within a period of 6 months after the new Rules come into effect. A Firm will need to certify that it:

(a) was already entitled to hold Client Assets or Insurance Monies, or both, as evidenced by the most recent auditor’s report, together with the date of submission of that report; and
(b) has in place systems and controls that meet the requirements for holding such Client Assets or Insurance Monies.

Changes to definitions of certain Financial Services have also occurred. The definition of Providing Custody in GEN 2.13 has been amended in order to correct an unintended anomaly. Where the previous text suggested that a Firm needed to carry out either safeguarding or administering to be Providing Custody, the policy intention is that they Provide Custody only if they carry out both of these activities.

In addition, changes to the definition of Operating an Exchange have occurred. The intention here is to provide greater clarity and legal certainty overall on what activities are inherently a part of operating an exchange, by introducing more specific provisions.

Changes to CIR Module
CIR 15.1.10 has, to date, required certain information on Funds to be reported to the DFSA by Authorised Firms, with a reporting deadline of four months after the Firm’s financial year end. This rule has now changed and requires all Firms to submit the return by the end of January every year which reports on the preceding calendar year. Reports that Firms are due to submit in 2016, after the end of their financial year, are to still be submitted.

Please note that as well as the above, a raft of changes have occurred to the CIR Module in relation to the DFSA rules around property funds and money market funds. These changes were first outlined in DFSA Consultation Paper 102.

Changes to AMI and MKT Modules
In 2012 and 2013, the MKT and AMI Module respectively were updated by the DFSA. Since the implementation of those revised Rules, the DFSA had identified a number of changes that were required to be made. These amendments have now been made in order to provide clarity to certain elements of the rules.

Changes to the FER Module
The DFSA has added a new exemption within FER to address situations that have arisen in the issuing of securities. Lawyers who meet the DFSA defined term of a ‘Designated Non-Financial Business and Profession’ (DNFBP) are to be able to pay listing fees on behalf of their clients. In addition, certain members of a Firm’s group are able to make payments of fees on the Firm’s behalf.

Changes to the Representative Office Module
Representative Offices are now allowed to share premises with another Authorised Firm within the same Group.

DFSA Consultation Paper No. 105

The DFSA has issued Consultation Paper No. 105 for which parties have until 14th April 2016 to submit comments. The proposed changes look to increase the range of transactions and interactions which can take place online. The DFSA intends to introduce an external interface (i.e. an online portal/gateway) that will allow entities and individuals (at all stages of the application and registration process) to submit electronic data directly to the DFSA. The portal will be accessible from the DFSA website, in the same way as is currently the case for the Electronic Prudential Reporting System (EPRS). The proposed interface endeavours to be more than just a platform for submitting electronic versions of paper forms. Instead, information will be reviewed and verified within the portal and then transferred to the DFSA’s internal systems where it can go on to be used to generate automated reminders such as due dates for the submission of data to the DFSA.

The two phase roll out would see the following forms to be submitted through the new online portal:

Phase 1

  • AFN AUT CORE - applications to Advise and/or Arrange in relation to Investments and/or Credit.
  • AFN AUT IND1 - applications to be an Authorised Individual as part of the above.
  • AFN AUT REP - applications to establish a Representative Office.
  • AFN AUT IND4 - Applications to become a Principal Representative.
  • AFN AUT QIFM - applications to be a QIF Manager.
  • AFN AUT QIF - applications to set up a QIF.
  • AFN AML - Annual AML return for all Relevant Persons.

Phase 2 (tentative)

  • AFN AUT CORE – other applications to be licensed.
  • AFN AUT IND1 – other applications to be an Authorised Individual.
  • AFN AUT AMS – Asset Management Supplement as part of an application.
  • AFN AUT PFS – Public Fund Supplement as part of an application.
  • AFN AUT EFF – Exempt Fund Form as part of an application.
  • AFN AUT EFM – application to be an External Fund Manager.
  • AFN AUT EXF – External Fund notification form.
  • AFN AUT CON – applications and notifications concerning a Change in Control.
  • AFN GEN 1 – request for a waiver or modification.
  • AFN SUP 4 – application to vary a licence.
  • Applications for endorsements.

With regards to the annual AML Return for all Relevant Persons, instead of being due four months after the end of the Relevant Person’s financial year, the DFSA is moving to make this return due by the end of September each year going forward. The report will be required to cover the period from August of the previous year up to and including July of the lodgement year. The DFSA will, if it proceeds with these proposals, provide further information on transitional arrangements in due course. The rationale behind this fixed reporting period decision is that it will hopefully reduce the pressure piled on many Relevant Persons during the busy time after their financial year end, by cutting the number of reports that are tied to and need to be provided during this interval. The proposal to reduce the submission period for the annual AML return, from four months to two months, is to enable the DFSA to maximise the benefit of moving to the same reporting period for all Relevant Persons. The DFSA will be better able to analyse DIFC-wide data, which has not been previously available for the same period – in a timely manner.

In addition, the DFSA is considering the use of self-certifications of compliance by Authorised Firms. These declarations could serve as a supplemental supervisory tool to assess compliance with key DFSA rules on a periodic basis by certain categories of Authorised Firms. The DFSA intends to test this approach by making the declarations available using the proposed online portal and asking certain Authorised Firms to complete declarations, stating their Firm’s compliance with a number of DFSA requirements and providing the Firms with an opportunity to explain non-compliance, if applicable. At this stage, the purpose of this self-certification will be to try and obtain information about the compliance position of lower risk Authorised Firms without having to conduct such frequent ‘catch-all’ on-site inspections - which are onerous both for both the DFSA and for Authorised Firms in resource terms - as is done presently. Participation in the tests will be voluntary. After a period of testing, the DFSA will assess whether the use of self-certification delivers benefits in terms of the overall level of compliance; of identification of compliant and non-compliant activity; and in relation to the effective use of DFSA resources. If this assessment is positive, at that point the DFSA would likely consult publicly on the introduction of requirements for self-certification, on a periodic basis, for specified categories of Authorised Firms.

DFSA Legislative Summary

The DFSA has provided information pertinent to the legislation for which it exercises administrative powers. To clarify, the following Dubai International Financial Centre Laws are administered by the DFSA:

  • Regulatory Law 2004
  • Markets Law 2012
  • Law Regulating Islamic Financial Business 2004
  • Trust Law 2005
  • Collective Investment Law 2010
  • Investment Trust Law 2006.

Further, the DIFC Registrar of Companies has delegated enforcement powers and functions to the DFSA for the following DIFC administered Laws (as per the Instrument of Delegation):

  • Companies Law 2009
  • Limited Partnership Law 2006
  • Limited Liability Partnership Law 2004
  • Insolvency Law 2009
  • General Partnership Law 2004

Additionally, the DFSA administers the DFSA Rules (subsidiary legislation made under the Regulatory Law 2004) and has the power to amend these by way of a ‘rule-making instrument’. Since April 2011, the rule-making instruments simply repeal and replace an entire module of Rules with an updated consolidated version. To ascertain what changes were made to a particular module of Rules, reference must be made to the Amendments to Legislation sub-section, Notice of Amendments to Legislation. To view amendments made to Laws administered by the DFSA, individuals are directed to the Amendments to Legislation sub-section, Amendment Laws.


Further information
If you would like to discuss these latest developments in more detail, please contact:
Clare Curtis (CCurtis@cclcompliance.com)

Middle East Updates

Includes:

  • Integrated Regulatory System for QFCRA and QCB
  • Multiple MoUs Signed by UAE Central Bank
Integrated Regulatory System for QFCRA and QCB

The Qatar Financial Centre (QFC) legislation is currently under final review ahead of implementation which will see an integration of the two current financial regulatory bodies, the Qatar Financial Centre Regulatory Authority (QFCRA) and the Qatar Central Bank (QCB). The ultimate judicial system for QFC licenced firms will be the Supreme Judicial Council of Qatar, when the new legislation comes into effect. This move will afford QFC licenced firms better access to the Qatar financial sector as a whole and see more of them listed on the Qatar Exchange. Non-QFC licenced firms will also benefit from the new law, gaining access to the QFC courts. The law is expected to be implemented within 2-3 months and will come in line with the laws of other free-zones in the region with on-shore access.

Multiple MoUs Signed by UAE Central Bank

A Memorandum of Understanding (MoU) has been signed between the UAE Central Bank and the Abu Dhabi Global Market Financial Services Regulatory Authority (ADGM FSRA). The bodies have agreed to cooperate on regulatory matters as well as on the supervision of financial institutions in both jurisdictions. The parties have agreed to exchange information in line with the principles of the Bank for International Settlements Home-Host. The MoU has formally recognised the existing relationship between the two regulators.

Additionally, the UAE Central Bank has signed a MoU with the Reserve Bank of India to consider entering into a currency swap agreement. The countries have strong bilateral business ties and the proposed currency swap agreement would strengthen those trade relationships, permitting businesses in both nations to expand. The arrangement would establish stable, fixed exchange rates between the countries which would mitigate the risks and costs associated with foreign deals and enable businesses to take advantage of reasonable local loan rates


Further Information
If you would like to discuss these updates in more detail, please contact:
Christopher Hobbs (CHobbs@cclcompliance.com)

International Developments

Includes:

  • Outcomes of FATF Plenary Meeting
  • EU Counter Terrorist Financing Measures
  • FCA and PRA’s New Bank Start-Up Unit
  • FCA Warning to CFD Sector
  • Somalian President Signs Money Laundering Bill
Outcomes of FATF Plenary Meeting

The below outcomes were published in a statement issued by the Financial Action Task Force (FATF) following the conclusion of their plenary meeting on the 19th February 2016:

  • Malaysia has been added as an official member of FATF,
  • Israel has been made an official observer of FATF,
  • Algeria, Angola and Panama’s progress in addressing their anti-money laundering deficiencies was acknowledged and the jurisdictions have now been removed from FATF’s compliance monitoring process,
  • FATF reiterated their concerns regarding Iran and North Korea who have still failed to address the risks of terrorist financing and money laundering in their regimes. This poses a genuine threat to the ‘integrity of the international financial system’ and as such FATF members are called to give special attention to business relationships and transactions with these jurisdictions,
  • FATF raised concerns over Brazil’s failure to meet FATF standards in criminalising terrorist financing. It has advised that further action may be taken if this is not adequately resolved by the next plenary meeting in June this year.

Subsequently, the two current FATF public documents that identify jurisdictions with strategic AML/CTF deficiencies can be broken down as follows:

FATF Public Statement (call for action)

  • Iran
  • Democratic People's Republic of Korea (North Korea)

Improving Global AML/CTF Compliance: Ongoing Process (other monitored jurisdictions)

  • Afghanistan
  • Bosnia and Herzegovina
  • Guyana
  • Iraq
  • Lao PDR
  • Myanmar
  • Papua New Guinea
  • Syria
  • Uganda
  • Vanuatu
  • Yemen
EU Counter Terrorist Financing Measures

A number of counter-terrorist financing (CTF) initiatives have been proposed for Europe this month. For instance, German and French Finance Ministries recently met to discuss introducing a cap on cash transactions across the region. In order to better prevent money laundering and terrorist financing, by restricting the potential value of anonymous exchanges, the parties suggest a limit of EUR 5,000 to be enforced for cash transactions throughout Europe.

In addition, the 28 Finance Ministers of the EU have requested that the European Commission (EC) approach the European Central Bank to broach the possibility of limiting the use of, or even revoking, the 500 Euro note. There are concerns that the high-value note is being misused by criminals to disguise the proceeds of their illicit actions or perpetuate terrorist activity. The 500 Euro note has a low public profile but accounts for a substantial proportion of all Euro notes in circulation (both internationally and domestic) which points the policy advisors to believe they are being used for illegitimate transactions.

Furthermore, the EC has announced plans to introduce new CTF rules by June 2016. Their proposal, aimed at inhibiting terrorists’ access to funds, will initially focus on regulatory development governing anonymous avenues of financial transactions. It is likely that the EC will soon require individuals to provide personal information and ID when exchanging virtual currencies or buying prepaid cards.

FCA and PRA’s New Bank Start-Up Unit

A New Bank Start-up Unit has been launched between the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) to specifically support new banks in getting established and to act as an accessible knowledge resource during the first few years after they’ve been authorised. The types of New Bank Start-up Unit support for new banks include:

  • access to the New Bank Start-up Unit helpline,
  • access to supervisors at both the PRA and the FCA via the helpline,
  • regular capital and liquidity reviews, if appropriate,
  • monthly regulatory update emails,
  • invitations to seminars targeted at new and prospective banks,
  • invitations to events, alongside other firms, on key regulatory topics.

This specialist unit will likely and suitably increase competition in the industry by giving banks a greater opportunity of succeeding.

FCA Warning to CFD Sector

The Financial Conduct Authority (FCA) reviewed 10 contracts for difference (CFD) firms and has subsequently issued a ‘Dear CEO’ warning letter, concluding that the issues they identified were sector wide.
Firstly, the regulator found the anti-money laundering (AML) systems and controls that the firms had in place were inadequate. The FCA’s letter reminded CFD institutions of their obligation to conduct an enhanced level of due diligence on clients assessed as high risk. However, this in itself was an issue as the FCA found that client risk classifications were often unreliable as they failed to take into consideration factors other than jurisdiction. The FCA also identified failures relating to appropriateness assessments. Processes for conducting these assessments were insufficient, as were the risk warning letters sent to clients who failed them. The CEO letter asked firms to review their systems, controls and processes, reminding them that misgivings and non-compliance can, and has previously, led to enforcement action.

Somalian President Signs Money Laundering Bill

Somalia this month passed a new Anti-Money Laundering and Combatting the Financing of Terrorism Law.
The important development and safeguarding of the country’s finance sector will provide support for the remittance industry. International entities had been reluctant to deal with transfers to Somalia at the risk of breaking laws if the funds ended up in the hands of terrorist groups, courtesy of a previously under-regulated jurisdiction. The law complies with Financial Action Task Force recommendations and will require fiscal institutions in the country to carry out a Money Laundering Risk Assessment, which is to be updated at least bi-annually.


Further information
If you would like to discuss these updates in more detail, please contact:
Nigel Pasea (NPasea@cclcompliance.com)

Financial Crime Update

Includes:

  • New Fraud Initiative in the UK
  • UK Company Convicted for Bribery
New Fraud Initiative in the UK

The Crime Survey for England and Wales 2015, conducted by the Office for National Statistics, revealed that 3.8 million people experienced some form of online fraud during the year ending June 2015. Such prevalence has given weight to the argument that a ‘joined-up’, co-operative approach is needed to police the financial crime. As such, a new body has been established called the Joint Fraud Taskforce (JFT). Reporting into the UK Home Office, its members include the City of London Police, the National Crime Agency, the Bank of England, Cifas and Financial Fraud Action UK, as well as representatives from the largest retail banks in the country.

The initial focus of the JFT will be to limit the exploitation of gaps in the current system by improving intelligence-sharing between the finance sector, law enforcement and the Government. The task force will also aim to broaden understanding of fraud and therefore develop better ways to prevent it. Additionally, JFT hope to raise public awareness by developing a 10 ‘Most Wanted’ list of fraudsters.

UK Company Convicted for Bribery

For the first time, a corporation has been convicted under the UK Bribery Act 2010. This month, Sweett Group Plc, a UK building consultancy firm, has been fined GBP 2,250,000 for bribing an official in the UAE. The bribery amounted to GBP 680,000 which was paid to secure the building contract for a hotel in Abu Dhabi.
Despite having reported the offence themselves and admitting culpability, Sweett Group Plc were not granted a deferred prosecution agreement as they failed to both take action when concerns of this nature were raised by auditors in 2010 and because they did not co-operate openly with the Serious Fraud Office (SFO) during the investigation.

This action by the SFO is a stark reminder to multi-national firms of the international reach of legislation such as the UK Bribery Act and the US Foreign Corrupt Practices Act. Firms need to ensure that all employees understand and are mindful of these implications wherever their actions occur.


Further information
If you would like a more detailed discussion on these updates, please contact:
Clare Curtis (CCurtis@cclcompliance.com)

Enforcement Action

Includes:

  • OFAC Sanction Action
  • FinCEN and Treasury Co-ordinate Fine
  • Brokerage Firm Settles AML Allegations with SEC
  • Misconduct and Uncooperativeness Lead to FCA Fines
  • Three Banks Penalised by RBI
OFAC Sanction Action

The US Treasury Department’s Office of Foreign Assets Control (OFAC) has sanctioned two Lebanese nationals and a Lebanese business for laundering money for the designated terrorist group, Hezbollah. The individuals have allegedly used the Lebanese business Trade Point International SARL to transfer illicit funds in support of the terrorist organisation’s ‘commercial investment activity in Lebanon and Iraq’. As a result, any assets of the individuals that are based in the US have been frozen and further, US persons are prohibited in having any financial dealings with the sanctioned parties.

FinCEN and Treasury Co-ordinate Fine

A Florida branch of Gibraltar Private Bank and Trust Company (GPBT) has been fined a total of USD 6,500,000 in civil monetary penalties (CMP) for substantial deficiencies with their anti-money laundering (AML) systems. The issues were initially identified following a 2010 assessment by the US Treasury Department Office of the Controller of the Currency (OCC) – then-Office of Thrift Supervision. Before imposing their USD 2,500,000 portion of fines on the bank, the OCC placed GPBT under a Consent Order in 2014 as the recognised shortages had still not been addressed at that time. The Financial Crime Enforcement Network (FinCEN) has perceived GPBT’s action of continuing to operate with known system inadequacies to be a willful violation of the Bank Secrecy Act, leading to the second CMP of USD 4,000,000.

The significance of GPBT’s AML failings is that it hindered staff from filing timely Suspicious Activity Reports (SARs) between 2009 and 2013 – the sum of the associated transactions amounted to USD 558,000,000. The SARs could not be submitted as the bank’s monitoring systems during that time period did not contain adequate or accurate account opening information or customer risk profiles. GPBT also failed to establish an appropriate Customer Identification Programme or to sufficiently train their staff in SAR procedures. What’s more, the assessment revealed that the process for reviewing SARs was equally inefficient as the bank failed to resolve a system issue which generated a large number of suspicious activity alerts, a lot of which were false positives.

Brokerage Firm Settles AML Allegations with SEC

The US brokerage firm Brickell Global Markets Inc (Brickell) has agreed a settlement of USD 1,000,000 in association with allegations by the US Security and Exchange Commission (SEC) that the firm had violated anti-money laundering (AML) rules by failing to identify non-US customers who traded over USD 23,000,000 worth of securities through a Central American bank-owned account. SEC stressed that while no fraudulent activity was corroborated, the flaws that were identified in Brickell’s AML framework were significant.

Misconduct and Uncooperativeness Lead to FCA Fines

The UK Financial Conduct Authority (FCA) has fined a number of individuals and firms in relation to a series of insurance schemes, including the professional indemnity insurance of solicitors. Investigations revealed that a Mr. Shay Reches was performing the regulated activities of a controlled function for Coverall Worldwide Limited, without FCA authorisation. Mr. Reches’ misconduct amounted to reckless handling of insurance premium payments. He allocated these funds to parties other than the insurers and reinsurers responsible for paying claims on the policies. Consequently, 3 insurers (to whom the payments ought to have been allocated) accumulated debt substantial enough to cause them to go into administration, leaving the policy holders without cover.

Mr. Reches has been fined GBP 1,050,000 and the application of further conditions will see him pay an additional GBP 13,130,000 to the defaulted insurers. This is the first time an individual has been fined by the FCA for carrying out regulated activities without approval. Other individuals and companies involved in the aforementioned activity have also been fined for their lack of controls and oversight which permitted the conduct to go undetected.

In a separate case, the FCA has issued a monetary penalty of GBP 792,900 (following the proffering of a 30% discount) to an ex J. P. Morgan executive who failed to co-operate with the regulator (then the Financial Services Authority – FSA) in his role as an authorised person for CIO International. Achilles Macris was not forthcoming with the FSA about his concerns with the ‘London Whale’ portfolio and repeatedly withheld information as to the true extent of difficulties faced at that time (March & April of 2012), amounting to a violation of Statement of Principle 4. The enforcement action shows the regulator’s commitment to ensuring that an individual’s conduct and nature is compliant, not solely the activity itself.

Three Banks Penalised by RBI

The Reserve Bank of India (RBI) has imposed monetary penalties on three local banks this month.
Kapadwanj People’s Co-operative Bank Ltd was fined INR 200,000 for violating Banking Regulation Act 1949 laws and RBI guidelines concerning anti-money laundering (AML) practices and protocols for loaning to relatives/directors.

A fine of INR 500,000 was issued to Kutch Mercantile Co-operative Bank Ltd for similar statutory breaches and regulatory non-compliance, as well as for failing to implement a system to detect and report suspicious transactions.

Finally, Nasik Merchants Co-operative Bank Ltd was fined INR 500,000 by the regulator for violating their rules relating to AML, counter-terrorist financing and customer due diligence as well as state legislature breaches, namely of the Prevention of Money Laundering Act.


Further information
If you would like a more detailed discussion on these or other enforcement actions, please contact:
Clare Curtis (CCurtis@cclcompliance.com)

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