DFSA Latest Developments

Includes:

  • DFSA Release Consultation Paper No. 1
  • DFSA Release Consultation Paper No. 2
  • DFSA Regulation of Auditors Commended
  • DIFC Courts Ruling Enforced in Australia
DIFC Releases Consultation Paper No. 1

The Dubai International Financial Centre (DIFC) released Consultation Paper (CP) No.1 ‘Proposed Amendments to DIFC Legislation’. The CP showcases law makers’ intentions to introduce the new defined term of ‘Accounting Records’ to clarify the ‘underlying’ documents that companies and partnerships in the centre are expected to retain i.e. cheques; records of electronic funds transfers; invoices; ledgers and adjustments to financial statements (including journal entries); contracts; and worksheets supporting cost allocations, computations, reconciliations and disclosures. The changes will come into effect only once comments have been reviewed and the DIFC Laws Amendment Law is enacted.

DIFC Releases Consultation Paper No. 2

The Dubai International Financial Centre (DIFC) has released Consultation Paper (CP) No. 2 ‘Proposed Electronic Transactions Law’. With the new law, the DIFC Authority (DIFCA) will legislate that, within the DIFC:

  • Electronic signatures are enforceable;
  • Electronic records are as effective as hard copies; and
  • References to ‘writing’ in DIFC statute will include electronic means.

The new legislation will allow Centre Bodies to establish the conditions on which they will accept electronic documentation.

The law does look to exclude the following from the aforementioned conditions however:

  • The creation, performance or enforcement of a power of attorney or a declaration of trust (except implied, constructive or resulting trusts);
  • Any applicable provision in the Trust Law 2005;
  • The creation or execution of wills, codicils or testamentary trusts;
  • The creation, execution and use of affidavits or affirmations as evidence in court proceedings; and
  • Transactions involving the sale, purchase, lease (for more than 10 years) or other deposition of immovable property and the registration of other rights relating to such property.

Having established that electronic records are able to fulfil the same key functions as paper documents (as identified by similar international legislation) the DIFCA’s law proposes that information shall not be denied legal effect solely due to it being an electronic record. If the statute is implemented, stipulations elsewhere in existing law that refer to ‘written information’ will be satisfied so long as the ‘writing’ considered ‘preserves a record of the information contained therein and is capable of being reproduced in tangible form’. Similarly, record retention requirements will be deemed as met, including by electronic records, if the information can be reproduced and read.

The regulations have not been designed to be too granular, only a framework that is not anticipating to levy any penalties either.

DFSA Regulation of Auditors Commended

The European Commission (EC) has recognised the Dubai Financial Services Authority’s (DFSA) supervisory regime for auditors in the Dubai International Financial Centre. Having already been deemed as being of ‘equivalent status’, the EC has now expressed the view that the DFSA’s audit regulation system of oversight, external quality assurance and investigation is of sufficient competency and adequacy that it prevents the “unlawful disclosure of confidential information to any third person or authority”. This makes the DFSA the first audit supervisor in the region to have met the high European standards for information sharing and confidentiality.

DIFC Courts Ruling Enforced in Australia

Two years after a Memorandum of Guidance was signed between the Dubai International Financial Centre (DIFC) Courts and the Federal Court of Australia, the Supreme Court of New South Wales (Australia) has made a significant move by recognising and enforcing a judgement issued by the UAE financial free zone court.

The original case involved a claim against an ex-employee (the defendant) who was found guilty of deliberately and wrongfully interfering with their employer’s IT system. The Supreme Court of New South Wales (in the defendant’s home country) upheld the foreign judgement, satisfied that the original was sufficiently definitive and unambiguous. This should hopefully now set a precedent for DIFC Courts’ judgements being recognised by other common law jurisdictions.

 

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

Middle East Regulatory Updates

Includes:

  • UAE SCA Releases New IPO Regulations
  • Changes to Oman’s CAR
  • Saudi CMA Raises Trade Commissions
  • Second Bourse to Launch in Saudi
  • ADGM Signs Multiple MoU
  • How will Brexit Affect the GCC?
  • IMF’s Recommendations for the Economic Growth of the UAE
  • NBAD and FGB Merger
UAE SCA Releases New IPO Regulations

The UAE Securities and Commodities Authority (SCA) has released new rules for the country’s equity capital market. Qualified institutional investors (QII) can now rely on the allocation of shares for funding initial public offerings (IPOs), in place of the previous pre-funding requirement for investment applications. The pro rata allocation mechanism has also been removed.

Furthermore, the SCA has introduced more regulation for greenfield IPOs (newly-formed companies raising money to help fund business plans without underlying assets). It has implemented a minimum subscription amount of AED 5,000,000 for greenfield IPOs which should ensure that retail customers are limited and the high-risk investment is therefore mostly engaged by only well-informed, professional investors.

Other considerations addressed in the new IPO rules include governance for employee share option schemes, underlying activity, the book-building process and rights issuance.

Changes to Oman’s CAR

The Oman Capital Markets Authority (CMA) has amended capital adequacy requirements (CAR) for companies operating in securities. Having observed consolidated financial statement of aforementioned institutions (and gaining greater insight of the risks associated with subsidiaries’ assets) and the securities held for margin financing, the regulator has made changes to tailor risk management controls of firms in the capital market. Exposure requirements were reduced in tandem to increased hedging ratios for subordinated loans and in the capital buffer, from 25% to 50% of annual expenses. Conversely, the hedging ratio percentage for real-estate assets, ownership in profitable companies not listed on the market, profits and commissions have all been reduced.

According to the new CAR, affected companies must maintain 100% adequacy and are therefore required to undergo continuous monitoring, with the CMA requesting monthly CAR reports within 10 business days from the calendar month end. For organisations whose adequacy falls below 100% (which must be reimbursed within 30 days), a recovery plan will be developed for them by the Executive President of the CMA.

Furthermore, the regulator has encouraged licenced companies to meet a transitional period deadline of six months for updates to the capital adequacy calculations of each of their internal electronic systems.

Saudi CMA Raises Trade Commissions

The Saudi Capital Markets Authority (CMA) has raised the commission for trades on the Tadawul from 12 to 15.5 basis points per transaction and abolished the fixed commission rates that had been attributed to equity transactions of USD 2,668 or less. A portion of the increased commission intake will be used by the CMA to fund a new national investment awareness programme.

Second Bourse to Launch in Saudi

Saudi Arabia has communicated its plan to open a second bourse within the next 18 months (2018 launch) that is designed for small & medium-sized companies and new companies seeking funding. The Saudi Capital Markets Authority has said the new market is expected to compliment, rather than compete, with the existing Tadawul.

ADGM Signs Multiple MoU

1) The Abu Dhabi Securities Exchange (ADX) has signed a Memorandum of Understanding (MoU) with the Abu Dhabi Global Market (ADGM). The agreement encourages bilateral cooperation and for ADX, the MoU continues its commitment to collaborating with financial centres in the region. Both bodies will set up working groups to design products and initiatives that promote the economic development of the state.

2) The ADGM signed a MoU with the UAE Ministry of Finance to establish a framework for tax purposes (in the centre) that allows for the automatic exchange of relevant information and evidences a commitment by both parties to international agreements of the same vain.

3) The ADGM has signed a MoU with the Shanghai Free Zone Authority, agreeing to work on a collaborative framework and develop the standing of both finance centres.

4) The ADGM Financial Services Regulatory Authority (FRSA) and the China Securities Regulatory Commission signed a MoU last month. The regulators wish to promote regulatory collaboration and the MoU covers the sharing of information, mutual assistance in supervision and the facilitation of cross-border activities.

How will Brexit Affect the GCC?

Following the shock UK Brexit vote – which saw a 48% vs 52% result in favour of leaving the EU – economies around the world have been trying to manage the fallout and provide reassurance to worried investors.

In the UAE, the Central Bank has reported that the move should have little effect on the financial sector here as fiscal connections between the two countries are limited. Saudi Arabia has similarly downplayed concerns, noting that the Kingdom’s foreign assets are largely denominated in US Dollars rather than the Euro or British Pound.

For a UK perspective, please see CCL’s publication of June.

IMF’s Recommendations for the Economic Growth of the UAE

With due consideration having been given to the UAE’s fiscal reserves, directors of the International Monetary Fund (IMF) have recommended gradual adjustments be made to the country’s financial framework to promote economic growth. Suggested changes include the introduction of VAT and corporate income tax, a kerb on spending and a focus on domestic debt markets.

The IMF executive board is also supportive of revisions being made to banking regulations, it believes the finalised rules should promote central bank independence and incorporate global standards.

In February 2015 it was announced by The UAE’s Minister of State for Financial Affairs, Obaid Humaid Al Tayer that the government will start implementing a value-added tax (VAT) rate of five per cent from 1st January 2018.

NBAD and FGB Merger

The statistics released so far in connection with the much anticipated merger of the two GCC banking conglomerates, NBAD and FGB, include:

  • Effective date – Q1 2017;
  • New ownership structure – 52% FGB shareholders to 48% NBAD shareholders. Equating to a 37% ownership by the Abu Dhabi
  • Government (and related entities); and
  • Combined assets of AED 642 billion, making it the largest bank in the MENA region by assets.

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

International Developments

Includes:

  • EC Publishes New Rules and Country Risk List
  • FATF Amends Charities Recommendation
  • Concerns Over the Closure of Correspondent Banking Accounts
  • FinTRAC Develops Financial Crime Law
  • NYDFS Raises Executive Teams’ Awareness of Compliance Measures
  • OSC Launches Programme for Whistleblowers
  • US Pushes Bills to Increase Counter-Terrorism Financing Efforts
  • Swiss Federal Tax Administration to Cooperate with IRS
  • Russian Develops Framework to Improve Financial Supervision
  • Progress by EU in Implementing AMLD4
  • Guernsey Signs Agreements to Share Beneficial Ownership Info
  • Treaty Reached by Italian and Holy See Financial Regulators
  • Bermuda Widens Scope of Entities
  • African Tax Authorities Introduce New Venture to Tackle Corruption
  • New Outlook Rating for Ukraine
  • Power to Suspend Transactions Granted to Turkey’s FCIB
EC Publishes New Rules and Country Risk List

The European Commission (EC) has proposed new legislation which would require virtual currency exchange services and custodial wallet providers to undertake identification measures on customers in order to maintain centralised databases of virtual currency users, the information of which would be shared between member states. The EC also plan to cap the total amount permitted to be used in a single transaction by pre-paid cards to EUR 150.

Such efforts endeavour to repeal the anonymity associated with these financial products (which is the draw for persons that utilise them to finance terrorist activity) and knowledge of the industry is paramount if regulators are to construct a supervisory framework for virtual currencies – an area that is currently and shockingly not governed.

Additionally, the EC has developed rules to tackle concerns over tax evasion – which were born of the Panama Papers cache. The international body propose to establish (in many cases public) registers to record the beneficial owners of companies and trusts in its jurisdiction. Due diligence on existing accounts may be necessary to facilitate this. The EC suggest that the ownership information of these registers should be shared and accessible between member states too.

Finally, last month the European Commission also adopted a list of countries which it has identified as having strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes. Member states’ financial institutions will need to carry out enhanced due diligence on relationships and transactions of parties from the countries identified, which are pulled from FATF plenary meetings’ circulations: Afghanistan; Bosnia and Herzegovina; Guyana; Iran; Iraq; Lao PDR; North Korea; Syria; Uganda; Vanuatu; and Yemen.

FATF Amends Charities Recommendation

The Financial Action Task Force (FATF) has amended guidance pertaining to charities (Recommendation 8) in response to the findings of their 2014 FATF Typologies Report and the 2015 Best Practice Paper. The blanket direction that non-profit organisations are ‘particularly vulnerable’ to abuse by the financiers of terrorism has been replaced by more measured and risk-based guidance:

“Countries should review the adequacy of laws and regulations that relate to non-profit organisations which the country has identified as being vulnerable to terrorist financing abuse.”

Concerns Over the Closure of Correspondent Banking Accounts

As big banks continue to close correspondent accounts – in major de-risking efforts – with developing countries like Belize, the self-perpetuating cycle creating sub-par compliance levels is reinforced. By cutting off their access to the global financial network because they are deemed high-risk, these countries are unable to maintain or improve compliance standards and high-risk activity occurrences grow.

The International Monetary Fund has spoken out over fears of marginalisation and pointedly mentioned a need for greater clarity from regulators to institutions as to how these situations can be better addressed.

FinTRAC Develops Financial Crime Law

Guidance material has been published by Canada’s Financial Transactions and Reports Analysis Centre (FinTRAC) to support reporting institutions in the country implement changes made to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. Relevant organisations have a one year transitional period (ending June 17th 2017) to adopt the new methods in the guidance which relate to identification verification.

Other changes which were made to the statute that are not elaborated upon in the new guidance include:

  • An expansion of the definition of a PEP to encompass domestic PEPs and heads of international organisations, as well as a requirement to carry out periodic monitoring of existing account holders to determine if an individual’s PEP-related Person status has changed. Also, the period of time that a PEP holds their status for has been reduced to 5 years and the review and approval time for PEP relationships has been increased to 30 days;
  • Record keeping requirements are now inclusive of the records of any reasonable measures taken to ascertain particular information;
  • Recognition of electronic signatures;
  • Business risk assessments must include a review of the risks associated with new technologies and the activities of specified affiliated entities; and
  • Amendments to administrative penalties e.g. having a correspondent banking relationship with a shell company

is now considered a ‘serious’ violation and is penalised accordingly.

NYDFS Raises Executive Teams’ Awareness of Compliance Measures

The New York Department of Financial Services (NYDFS) has issued new rules which will come into effect on January 1st 2017. Dubbed the ‘Final Regulation’, it obligates regulated organisations to annually pass board resolutions, or a senior compliance officer certification, to confirm that adequate steps have been taken to meet anti-money laundering and counter-terrorism financing regulation. Firms will need to retain the supporting documentation for the compliance declaration for 5 years.

The NYDFS has highlighted that the following controls would be indicators of compliant practice:

  • Maintaining a Transaction Monitoring Programme; and
  • Maintaining a ‘watch list’ filtering programme.

The new rule will hold senior management more accountable and instils a compliant culture with, hopefully, immersed executive teams.

OSC Launches Programme for Whistleblowers

The Ontario Securities Commission (OSC) has introduced a reward programme for whistleblowers in Canada’s securities industry, whose information leads to successful enforcement action. Applicable individuals could stand to receive 5% to 15% of the total monetary penalties imposed by a ruling, plus any voluntary payments (with a combined total cap of CAD 1,500,000). Should the sanctions and voluntary payments ordered and received by the regulator exceed CAD 10,000,000, then the whistleblower’s reward limit would increase to CAD 5,000,000.

The OSC expects the new programme to improve its supervisory powers as it should provide reliable and actionable intelligence. The regulator has also taken measures to protect whistleblowers by permitting anonymous tips and including anti-reprisal rules which would allow the OSC to take enforcement action against employers who try to punish whistleblowers.

US Pushes Bills to Increase Counter-Terrorism Financing Efforts

New legislation has been drafted in the US which, although having little impact on the operation of financial institutions, will increase the Treasury Department’s Financial Crime Enforcement Network’s (FinCEN) ability to stub out financing to terrorist organisations. The three bills have been approved by the House of Representatives and include the following proposals:

  • Creation of a national strategy for counter-terrorism financing;
  • Recommendations for improving coordination between attachés of congress departments and foreign financial ministers;
  • Combination of the two Treasury agencies, the FinCEN and the Office of
  • Foreign Assets Control; and
  • Inclusion of electronic transactions in illicit funds tracking.

A fourth bill, looking to expand information sharing permissions, was rejected over concerns that it impeded civil liberties of privacy.

Swiss Federal Tax Administration to Cooperate with IRS

Account holders at HSBC Holdings PLC.’s Swiss private bank have been notified that the Swiss Federal Tax Administration intends to share their banking information with US tax authorities. This is in relation to appeals to them by the US Inland Revenue Service (IRS) seeking assistance with tax evasion investigations concerning US persons who were the beneficial owners of Swiss-registered domiciliary companies between 2002 and 2014. Account holders have until the 25th of August to appeal.

Russia Develops Framework to Improve Financial Supervision

The Bank of Russia (BoR) is moving to take a more European/US approach to financial supervision, considering reducing reporting requirements in place of steeper fines for violators of regulation. This comes in the wake of the BoR having shut down over a quarter of its banks and is evidently a determination to ensure the remaining institutions don’t fall into, what the regulator has labelled, ‘dubious operations’ i.e. fake trades or loans being issued as a cloak for the international movement of money.

Also in Russia, new terror legislation has been released which introduces the crime of terrorism financing, holding a penalty of life/15 to 20 years imprisonment.

Progress by EU in Implementing AMLD4

Slovenia has taken steps towards being one of the first European Union (EU) member states to implement EU Directive 2015/849 (AMLD4) by adopting a new draft of their Prevention of Money Laundering and Terrorist Financing Act. Changes to the law include provisions for establishing a register of beneficial owners and relieving some measures for tax payers, as well as granting investigative powers to the Office for Money Laundering Prevention. Germany also looks set to have revised legislation soon in place and this pressure from other EU members could force the UK to adopt the standards of AMLD4 ahead of the required deadline (June 2017). The new rules mandate for, amongst other things, greater regulation of customer due diligence and sanctions.

Guernsey Signs Agreements to Share Beneficial Ownership Info

Guernsey has shown its commitment to combatting financial crime by joining the G5 initiative to exchange beneficial ownership information and reaching an agreement with the UK for the mutual sharing of beneficial ownership information with law enforcement authorities. Jersey made similar arrangements earlier this year, as reported in the April Edition of our MENA Regulatory Update.

Treaty Reached by Italian and Holy See Financial Regulators

The Vatican’s Financial Information Authority and the Bank of Italy have signed a cooperation agreement designed to improve transparency and fight money laundering. The details of the agreement promote the mutual sharing of information pertinent to effective fiscal supervision.

Bermuda Widens Scope of Entities

Real estate companies and dealers in high-value goods have been added to the list of businesses that are expected to adhere to Bermuda’s anti-money laundering and counter-terrorism financing legislation, following the approval of the Proceeds of Crime Amendment (No. 2) Act. The statute was necessary for the country to meet international regulatory standard but some provisions have been criticised, such as the appointment of some PEPs as individuals to whom investigative disclosures may be made.

African Tax Authorities Introduce New Venture to Tackle Corruption

The WU Global Tax Policy Center has teamed up with the African Tax Institute to launch a new project aimed at “identifying the links between corruption, money laundering and tax crimes”. The Tax and Good Governance Project 2015-2018 will initially focus on the African countries of Ghana, Nigeria and South Africa. It is expected to make headway in the combatting of tax crimes and illicit activities in the continent by promoting the benefits and ways in which law enforcement agencies and tax authorities “can cooperate to counter corruption and bribery”.

New Outlook Rating for Ukraine

Following the flotation of its currency, Ukraine has managed to reduce its inflation from over 60% last year, to less than 10%. The economy has stabilised significantly and Moody’s recent change in their outlook rating for the country to ‘stable’ is encouraging for the banking sector and is expected to bring with it greater deposits and fiscal growth.

Power to Suspend Transactions Granted to Turkey’s FCIB

A new decree published in Turkey grants the country’s Financial Crime Investigation Board (FCIB) with the power to suspend transactions that are suspected to elude to money laundering or terrorist financing. This action will be relieved subject to a decision and potential investigation by the Finance Ministry.

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

 

Financial Crime Updates

Includes:

  • Notable Ruling in Cryptocurrency Case
  • 1MDB Scandal Continues
  • Another Culprit Caught in the Petrobas Headlights
  • Western Union Meet AML Standards in Arizona Settlement
Notable Ruling in Cryptocurrency Case

A significant judgement has been passed in the US involving cryptocurrencies. A Miami circuit judge has dismissed the money laundering charge against Michell Espinoza who was accused of ‘operating as an unlicensed money transmitting business’ when he sold and laundered USD 1,500 in bitcoins to an undercover police officer. The judge deemed that cryptocurrency was not ‘tangible wealth’ and was not backed by a bank or government so could not be defined as ‘money’ for the purposes of the criminal charge. Experts have argued that the widespread impact of the judgement will actually be fairly limited though as federal laws and definitions are broader than those of the state of Florida.

1MDB Scandal Continues

The Monetary Authority of Singapore (MAS) has found that the activity of DBS Bank, Standard Chartered Bank and UBS Singapore, in relation to 1MDB, indicates failings in the banks’ controls, onboarding processes, transaction monitoring and suspicious activity reporting.

The risk of these banks being closed down by MAS, as was the reported case for BSI Bank in the May Edition of our MENA Regulatory Update, has been abated by the regulator as it commented that investigations of these three banks did not reveal staff misconduct and the control weaknesses identified were specific. Heavy enforcement action is assured though.

Another Culprit Caught in the Petrobas Headlights

The Brazilian construction company, Odebrecht, is being investigated for their part in the on-going Petrobas saga. In accordance with a whistleblower’s report, the company is accused of buying an offshore bank in Antigua and Bermuda – Meinl Bank Antigua Limited – to funnel bribes amassing over USD 1.6 billion to politicians and businessmen at the expansive oil corporation, between 2010 to 2014.

It is claimed that Odebrecht used third parties to gradually accumulate a controlling share of the bank and adopted code names, specialised software and a web of bank accounts in order to move the funds without arousing suspicion.

Whilst the case is built, the accounts of Meinl Bank Antigua Limited have been frozen.

Western Union Meet AML Standards in Arizona Settlement

Following their Anti-Money Laundering Settlement Agreement Amendment of 2014 with the Arizona Attorney-General, Western Union Financial Services Inc. has been found to have “successfully implemented all of the primary recommendations” set out in the agreement. An independent court monitor has judged that Western Union has in place an anti-money laundering (AML) compliance programme that is in accordance with the Bank Secrecy Act and other relevant regulations and best practice, in order to effectively combat money laundering along the state’s south-west border.


Further information

If you would like a more detailed discussion on these or other enforcement actions, please contact:
Carwyn Evans (CEvans@cclcompliance.com)

Enforcement Action

Includes:

  • Successful Rigging Charges in UK and US
  • RBI Fine Banks for ‘Irregular’ AML Findings
  • Ex-Guatemalan President Charged with Money Laundering
Successful Rigging Charges in UK and US

Further to on-going probes against HSBC for foreign exchange rigging, two British executives were arrested and charged by US prosecutors last month. Mark Johnson (Global Head of Foreign Exchange Cash Trading) and Stuart Scott (ex-Head of Cash Trading for Europe and MEA) have been charged with wire fraud conspiracy for a scheme to front-run a USD 3.5 billion transaction in their favour and at cost to the client who was converting funds to GBP for the sale of a subsidiary. HSBC earned USD 5,000,000 from the transaction and USD 3,000,000 from FX trades placed. The US Justice Department and the UK Serious Fraud Office (SFO) have been investigating a series of rigging cases for years but struggling to bring about any charges, despite the growing evidence gathered, so this is a noteworthy prosecution.

In the UK, the SFO has now secured five convictions in relation to Libor rigging investigations. After the disappointment of the acquittal outcomes in January, hinged on a failure to prove the subjective dishonesty test, it’s an encouraging sign for prosecutors ahead of the next trials scheduled for 2017.

RBI Fine Banks for ‘Irregular’ AML Findings

The Reserve Bank of India (RBI) fined the Bank of Baroda (BoB) USD 754,000 last month, following an investigation of the organisation’s anti-money laundering (AML) controls which had been identified as ‘irregular’ by an internal audit last year. BoB has committed to an action plan to address the failings which pertained to transaction monitoring, FIU reporting and the assignment of Unique Customer Identification Codes.

Other fines recently issued by RBI for not dissimilar findings are Punjab National Bank, HDFC Bank, Allahabad Bank, UCO Bank and Bank of India.

Ex-Guatemalan President Charged with Money Laundering

The former president of Guatemala has been charged with money laundering and bribery. Despite pleas of innocence, the judge detained Otto Perez on the basis of evidenced produced by the International Commission Against Impunity in Guatemala. He is accused of “receiving hundreds of bribes for public contracts during his administration”.

 

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

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