This edition covers regulatory events and initiatives for the month of January 2017.

DFSA Latest Developments

Includes:

DFSA Update RPP Rulebook

The Dubai Financial Services Authority (DFSA) has made amendments to the RPP Sourcebook which comes into effect on 1st February 2017. Changes include:

  • Greater detail as to the requirements of a start-up entity seeking authorisation as a bank, to meet DFSA expectations. It is clear that the regulator will focus on the credibility and financial soundness of the proposed shareholders and that start-ups should demonstrate how the absence of a central bank in the Dubai International Financial Centre would affect their business plan, the adequacy of capital and capital management plan, plans for liquidity management and their ability to deal with stressed situations;
  • Confirmation of the DFSA’s powers to tailor the regulatory requirements it seeks from start-up applications, i.e. capital, liquidity, credit or investment limits;
  • A new chapter providing information for business transfer schemes, i.e. a scheme by an Authorised Firm to transfer all or a part of a financial service business to another body. The new chapter includes details on applying to the court for an order sanctioning the transfer scheme and where exclusions apply; and
  • Countries boycotted by the UAE are no longer listed as exclusions with regards to the DFSA exercising its powers to obtain confidential information on behalf of other authorities.
DFSA Issue CP No. 109

The Dubai Financial Services Authority (DFSA) has issued Consultation Paper (CP) No. 109 – Crowdfunding: SME Financing Through Lending. The CP proposes a framework for Firms intending to operate a loan-based crowdfunding platform and will be one in a series of papers in relation to the supervisor’s approach to regulation in this area, as well as FinTech in general. Interested parties have until 2nd March 2017 to provide feedback.

The DFSA has identified the following requirements as the regulatory fundamentals for loan-based crowdfunding platforms:

  • A tailored financial service and regime specifically designed for those operating such a platform;
  • The platform operator must have appropriate systems and controls;
  • Operational transparency and adequate disclosure to all participants – borrowers and lenders – on the platform;
  • Suitable checks on the platform participants (borrower and lenders);
  • Appropriate safeguarding and segregation of client money;
  • The development of business cessation plans; and
  • Rules relating to any facility enabling the transfer of rights or obligations under a loan agreement between lenders.

The proposal comes amid the launch of the Dubai International Financial Centre’s FinTech Hive Accelerator programme, which will start accepting applications towards the end of March.

DFSA Regulatory Framework Deemed Equivalent to the EU

The European Commission has recognised the Dubai Financial Services Authority’s (DFSA’s) regulatory framework for central counterparties as equivalent to that of the European Union (EU). The announcement evidences the DFSA’s successful implementation of international best practice – such as those set by the International Organisation of Securities Commissions – and its commitment to financial stability through a reduction in systemic risk. Moreover, it should boost cross-border activity between Nasdaq Dubai – the DFSA-licenced central counterparty – and its European equivalents.

DFSA Release 2017/2018 Business Plan

The Dubai Financial Services Authority (DFSA) has released its Business Plan for 2017/2018. The publication describes the DFSA’s strategic plan for the next two years – which remain delivery, sustainability and engagement – and the actions identified therein.

The business plan details that the regulator’s supervisory focus will include:

  • Corporate governance;
  • Remuneration practices;
  • Suitability;
  • Outsourcing and group structures;
  • Ensuring compliance with UAE and Dubai International Financial Centre laws;
  • Ensuring Firms do not exceed the scope of their licences;
  • Monitoring the effectiveness of compliance functions;
  • On-boarding processes, in particular documenting source of wealth and understanding complex legal structures; and
  • Monitoring trends in credit and liquidity risks against the backdrop of macroeconomic conditions and political developments.

The document also communicates the drivers for forthcoming Rulebook changes, which are:

  • The implementation of Basel III;
  • Resolution processes and powers to intervene with failing Firms;
  • FinTech; and
  • Suitability and leveraged products.

The DFSA publication also reaffirmed the supervisor’s commitment to the Tomorrow's Regulatory Leaders Programme.

ADGM Latest Developments

Includes:

  • ADGM Launch SPV Regime
ADGM Launch SPV Regime

The Abu Dhabi Global Market (ADGM) launched its Special Purpose Vehicles (SPVs) regime last month. It has received significant recognition and take-up with as many as 50 SPVs registering before the platform officially went live. The ADGM SPV regime is particularly attractive as it allows UAE businesses to make use of these strategic legal structures from home, without having to visit overseas jurisdictions, and is further supported by a well-established regulatory framework in a locale that offers favourable tax options.

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

 

Middle East Regulatory Updates

Includes:

  • UAE Central Bank Release New Regulations for PSPs
  • UAE Government Issue New Rules for VCFs
  • DFM to Permit Short-Selling
  • Oman CMA Updates
  • Correspondent Banking Relationships Grow for Iranian Bank
UAE Central Bank Release New Regulations for PSPs

The UAE Central Bank has issued new rules entitled the Regulatory Framework for Stored Values and Electronic Payment Systems. The e-payment regulations are applicable to specified electronic Payment Service Providers (PSPs) – excluding those in any UAE financial freezones – that provide stored value facilities and they obligate such organisations to obtain the requisite licence from the UAE Central Bank (note the process has been tailored for regulated PSPs that are licenced commercial banks in the UAE).

The rules detail the criteria that a regulated PSP would need to meet to obtain a licence, which includes that it must:

be incorporated in the UAE (excluding financial freezones);
evidence it has sufficient experience, knowledge and expertise to provide e-payment services;
meet capital requirements; and
establish governance and compliance policies.
Compliance policies would reflect and ensure adherence to a number of regulations including:

restricting outsourcing arrangements, for the provision of digital payment services, to UAE Central Bank approved arrangements with parties carrying out services in the UAE (excluding financial freezones) only;
obligating user and transaction data to be stored, for 5 years, within the UAE (excluding financial freezones);
ensuring the segregation of user-held funds;
obligating regulated PSPs to enter into consumer service agreements – which detail, amongst other things, the company’s privacy policy – with every user; and
prohibiting the use of virtual currencies (which has been defined as, subject to exclusions, “any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value”).
Other provisions in the rules include those pertaining to the UAE Central Bank’s right to impose access regimes on payment systems and that it will maintain lists of all licenced PSPs and their outsourced service providers.

The regulations came into effect on 1st January 2017 but existing PSPs have a one year transitional period.

3.2 UAE Government Issue New Rules for VCFs

The UAE Government has issued new rules to regulate venture capital funds (VCFs). They require that:

the net assets of VCFs should be “equal to or greater than its risk exposure”;
VCFs must carry out, at least on an annual basis, a review of their investments;
VCFs with assets under management of AED 180,000,000 or less must draft an annual report summary; and
VCFs with assets under management of over AED 180,000,000 must:
- issue an annual report (to IFRS Standards); and
- appoint a risk officer.

The new regulations were issued as part of the Government Accelerators initiative, which aims to streamline the attainment of the key targets set in the National Agenda of the UAE Vision 2021.

3.3 DFM to Permit Short-Selling

The Dubai Financial Market (DFM) has announced that it plans to allow short-selling on a determined list of stocks, a move that will strengthen liquidity in the market and bring the exchange’s standards closer to those of its international counterparts. The list of securities eligible for short-selling by the DFM will be established in accordance with the UAE Securities and Commodities Authority’s (SCA) regulations and by heeding international recommendations.

In 2012, SCA further developed its rules on short-selling in an attempt to alleviate the country’s equity status but until now, the bourses have yet to utilise these changes – the Abu Dhabi Securities Exchange has also recently declared its forthcoming intention to implement short-selling though.

3.4 Oman CMA Updates

The Capital Market Authority (CMA) of Oman has approved a new investor fund segregation form to aid companies to monitor customer assets. The form should be completed at the end of the first trading day of each week and submitted to the regulator the next day. This new reporting requirement comes into effect February 2017.

Also throughout January, the CMA provided draft regulations to concerned parties, for which they have until the 9th February 2017 to provide comments. The new rules seek to adopt the standards set by the International Organisation of Securities Commissions and in turn develop the local industry. The law will extend the scope of agencies such as the Muscat Securities Market and the Muscat Clearing and Depositary Company, as well as define investigative and enforcement powers in relation to the legislation.

Finally, a Memorandum of Understanding has been signed between the Monetary Authority of Brunei and the CMA which includes provisions for exchanging information, coordination in dispute resolutions and cooperation with regards to investor protection. The parties have also resolved to develop frameworks to improve professional expertise and understanding in their respective bourses.

3.5 Correspondent Banking Relationships Grow for Iranian Bank

Following the lifting of certain sanctions on Iran as a result of the nuclear deal made, Bank Melli Iran (BMI) has established correspondent banking relationships with up to 25 foreign banks. These arrangements are increasingly facilitating Iranian individuals to process cross-border money transactions. According to a director at BMI’s Department for Foreign Exchange, “customers are now able to transfer up to EUR 2,000 per month”.

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

International Developments

Includes:

  • FinCEN Update Jurisdiction List
  • EUROPA Update Directive on the Prevention of ML/TF
  • Basel Committee Release Guidance for Correspondent Accounts
  • FINRA Issue Guidance for Blockchain Usage
  • Trade Finance Principles Updated by a Host of Industry Experts
  • Estonia Designated as Potential New Money Haven
FinCEN Update Jurisdiction List

Guyana has been removed from the US Financial Crimes Enforcement Network’s (FinCEN’s) list of jurisdictions with anti-money laundering/counter-terrorism financing deficiencies (Section II), following last year’s action by the Financial Action Task Force and reaffirming the country’s recent progress in combating financial crime.

EUROPA Update Directive on the Prevention of ML/TF

Further developments from Europe with regards to virtual currencies sees the European Parliament and the European Council of the European Union (EUROPA) make amendments to its directive on the prevention of the use of the financial system for the purposes of money laundering (ML) or terrorist financing (TF). It is now intended for Directive (EU) 2015/849 to apply to providers of virtual currencies, custodian wallets and fiat currencies, causing such organisations to implement measures to identify customers and report suspicious activity. The directive is expected to be transposed by 26th June 2017.

Basel Committee Release Guidance for Correspondent Accounts

The Basel Committee on Banking Supervision (Basel Committee) has released amendments to its guidance in relation to correspondent banking. As with the publications from other intentional bodies, it seeks to address the growing pandemic of ‘de-risking’ by financial institutions who are reportedly taking a blanket approach and closing these business relationships.

The Basel Committee’s new proposed amendments convey that “not all correspondent banking relationship bear the same level of risk” and it requests affected parties to submit their comments on the paper by 22nd February 2017.

FINRA Issue Guidance for Blockchain Usage

The US Financial Industry Regulatory Authority (FINRA) has released a new publication regarding distributed ledger technology – a.k.a. blockchain – in response to growing intrigue by the securities industry on how the benefits of this technology may be harnessed and utilised.

The FINRA report highlights the risks of this technology – namely operational and security-related – and outlines some pertinent implementation considerations for Firms:

How will firms manage net capital requirements when holding cryptosecurities, digital currencies or “other cash-backed token holdings”;
How will firms maintain compliance with anti-money laundering regulations and customer identification programmes; and
How will firms maintain compliance with data protection requirements i.e. providing information to customers and managing account information?

Trade Finance Principles Updated by a Host of Industry Experts

Three international bodies have collaborated to produce an update to the Trade Finance Principles of 2011. The Wolfsberg Group, the Banking Commission of the International Chamber of Commerce and the Bankers Association for Finance and Trade have made amendments to successfully reflect the current landscape of trade transactions. It is hoped that the paper will promote uniformity by addressing existing regulatory expectations around the world and detailing necessary due diligence requirements.

Estonia Designated as Potential New Money Haven

According to the Australian Transaction Reports and Analysis Centre, wire transfers from Australia to Estonia have increased by 11,000% from 2010 to 2016, a staggering climb which experts are interpreting as an indication that the European country is a rapidly growing money haven for the Australian dollar. This theory is particularly compelling when coupled with other statistics such as the fact that, notwithstanding this influx of funds, Estonian exports have been on a steady downward trajectory; despite Estonia’s unremarkable size, it is purported to be one of the most technologically advanced countries in the world; the global rise in overseas wire transfers is closer to just 5% per year.

It would be reasonable to question the legitimacy of this spike in figures and, thanks to a Memorandum of Understanding between Estonia and Australia, investigations of suspicious activity can and will be permitted to take place.


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

Enforcement Action

Includes:

  • Deutsche Bank Penalised for Failures by its Anti-Financial Crime Teams
  • FRBNY Issue Fine for Violations of AML Laws
  • Western Union Co. Confess to Fraud Charges
  • RBI Issue Fines for AML Regulation Breaches
  • Individual to be Sentenced for Breaches to AML Laws
  • CEO Held Accountable for Trading Scheme
  • DED Shut Down Illegal Dubai Transmitting Ring
  • Further Enforcement Action in 1MDB Saga
Deutsche Bank Penalised for Failures by its Anti-Financial Crime Teams

Deutsche Bank was fined by financial regulators on both sides of the pond last month following an investigation involving the bank’s Moscow, London and New York Offices. It was revealed that clients were making mirror trades to covertly convert roubles into dollars. The regulators have stated that the bank “missed numerous opportunities” to detect the scheme and that its anti-financial crimes teams were profoundly ineffective, leading to “unsafe and unsound” business operations. The UK Financial Conduct Authority (FCA) fined the bank GBP 163,000,000 and the New York State Department of Financial Services (NYDFS) imposed a USD 425,000,000 penalty.

Elsewhere, Deutsche Bank has confirmed that it has closed its correspondent banking relationship with the National Bank of Kenya (NBK) over allegations of money laundering, which NBK denies.

FRBNY Issue Fine for Violations of AML Laws

The Federal Reserve Bank of New York (FRBNY) has taken enforcement action against Nonghyup Bank and its New York branch. In a written agreement, it is reported that the Seoul-based financial institution breached Bank Secrecy Act laws and anti-money laundering (AML) regulations. The branch’s risk management framework was also deemed to be deficient.

Western Union Co. Confess to Fraud Charges

Western Union Co. has admitted to “aiding and abetting wire fraud” between 2004 and 2012. The company has also agreed with the US Department of Justice and the Federal Trade Commission to pay USD 586,000,000, which will go some ways towards compensating the tens of thousands of customers who were defrauded and whose money was laundered through the transmitter to human traffickers.

It has further been reported that 2,000 Western Union Co. agents have been disciplined in connection with pay-outs that were made by the criminals, in return for processing the illicit transactions. A total of 550,928 complaints were received by Western Union Co. between 2004 to 2015 for fraud, with associated losses averaging USD 1,148 per complaint.

RBI Issue Fines for AML Regulation Breaches

The Reserve Bank of India (RBI) has fined Mumbai District Central Co-Operative Bank (Mumbai Bank) INR 100,000 for violations of the regulator’s anti-money laundering (AML) rule. The penalty was imposed when RBI discovered that Mumbai Bank had failed to conduct requisite know-your-customer (KYC) measures on the office-bearers of 495 housing societies.

The Bombay Mercantile Co-operative Bank has also received a fine of INR 7,500,000 from RBI for similar AML/KYC failures.

Individual to be Sentenced for Breaches to AML Laws

Coin.mx, a bitcoin exchange that was in operation between 2013 and 2015, has been accused of facilitating a host of criminal activity and money laundering, including “assisting victims of ransomware attacks to transfer cash into the digital currency” without making suspicious transaction reports. As a result, one of the in-the-know operators faces up to 30 years imprisonment after pleading guilty to conspiracy to operate an unlicensed money transmitting business, conspiracy to commit bank fraud and conspiracy to obstruct an examination of a financial institution, having been accused of intentionally concealing transactions that were in breach of US federal anti-money laundering (AML) laws.

CEO Held Accountable for Trading Scheme

The ex-CEO of Exential, a forex trading company in Dubai that was shut down last year, has been held accountable for a scheme that amassed AED 50,000,000. Sydney Lemos has been arrested for illegal trading, as well as other civil court judgements. Not only did the company fail to come up with the 100% return it promised investors who committed USD 25,000 each, but the individuals have also lost their initial investment subscriptions.

DED Shut Down Illegal Dubai Transmitting Ring

An illegal money transmitting ring has been expelled in Dubai, according to the Department of Economic Development (DED). As many as 25 shops were revealed to have used an app called ‘Bkash’ and advertised to customers that they could transfer money to Bangladesh at an attractive rate. Not only were none of the businesses licenced by the UAE Central Bank to conduct such activity but the DED has warned that the practices of these organisations left individuals highly exposed to fraud.

Further Enforcement Action in 1MDB Saga

In connection with the 1MDB probe, the former manager of the Singapore branch of Falcon Private Bank has pleaded guilty to six money laundering counts and consequently sentenced to 28 weeks in jail, plus a fine of SGD 128,000. The charges pertain to the defendant’s failure to report suspicious activity in March 2013.

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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