DFSA Latest Developments


  • Issuance of Regulatory Policy and Process Module (May 2015 Edition)
  • DFSA and DIFC Registrar of Companies Co-host FATCA Outreach Workshop
  • DFSA Fines United Investment Bank Limited for AML Failings
Issuance of Regulatory Policy and Process Module (May 2015 Edition)

On 7th May 2015, the DFSA issued the May 2015 Edition of the Regulatory Policy and Process Module (RPP) which replaces the February 2015 Edition. The changes apply to the following chapters of the RPP Sourcebook, Chapter 8 – Confidential Regulatory Information, and Chapter 9 (section 9.3) – Waivers and Modifications (Making an Application).

The latest version of the RPP module can be found on the DFSA website.

DFSA and DIFC Registrar of Companies Co-host FATCA Outreach Workshop

The DFSA and DIFC Registrar of Companies (ROC) jointly hosted a workshop on the Foreign Account Tax Compliance Act (FATCA) on 19th May 2015. Ian Johnston, DFSA Chief Executive; Michael Ridgeway, DFSA General Counsel; Khalid Al Zarouni, DIFC Registrar of Companies; and other private consultants were present at the session.

FATCA affects those Financial Institutions (FIs) which have accountholders who are US Persons, or who may be eligible to pay US tax.

The United States (US) and the United Arab Emirates (UAE) are close to signing an intergovernmental agreement that will facilitate FIs reporting of information on their US accountholders.

Certain DIFC Firms will be required to report their US Accountholder data to the ROC who will then forward this to the UAE Ministry of Finance. The UAE Ministry of Finance will report the information to the US Internal Revenue Service.

The outreach session focused on details regarding the DIFC’s reporting process rather than the law. The attendees were advised to seek legal advice from qualified lawyers or consultants about anything specific to FATCA law.

DFSA Fines United Investment Bank Limited for AML Failings

The DFSA has imposed a fine of US$56,000 on United Investment Bank Limited(UIB) and has directed UIB not to on-board any new Clients unless and until such time that UIB appoints an experienced and independent third party, which is approved by the DFSA, to review the steps UIB proposes to take to strengthen their on-boarding process. The DFSA further directed UIB to develop a Remediation Plan to remedy the deficiencies related to AML and CTF.

UIB had a total of eight Clients consisting of seven corporate and one individual customers. Six of the corporate customers were Panama-based customers.

The Panama customers were Personal Investment Vehicles (PIVs) of Italian nationals incorporated in Panama. At the time of on boarding, the shareholding in some of the PIVs were in the form of bearer shares. UIB held the bearer shares on behalf of the beneficial owners to make sure that the beneficial ownership of each Panama customer did not change. Even so, bearer share ownership is prohibited under the AML rules.

DFSA findings identified that UIB had breached DFSA AML rules as set out below:

1 Assessing business AML risks: Since the majority of UIB’s customer were PIVs incorporated in Panama (a jurisdiction which has a high level of AML and corruption risk), UIB did not sufficiently identify and assess the risk of Panama and had not taken steps to ensure the Investment Vehicles had genuine and legitimate purposes.

2 Assessing customer AML risks: UIB on-boarded customers who had shareholdings involving bearer shares which increases the money laundering risks as the beneficial ownership is not identified and verified.

UIB dealt with the Panama customers through the PIV representatives who were given general power of attorney. This practice increases the money laundering risk as it obscures the information on beneficial owners.

3 Customer due diligence requirements: As a part of the customer due diligence, UIB failed to verify the identity of the customer and its beneficial owner on the basis of original or properly certified documents.

The files of Panama customers contained documents of Beneficial Owner Source of Wealth. These documents were obtained from the Italian Chamber of Commerce database. The documents listed the names of the companies in which the Beneficial owners of the Panama customers were directors and/or held shares. The files however did not contain details of the economic activity or history of these companies.

All documents were in Italian language, with no translation of the documents available. UIB did not have in place any effective method of translating documents from Italian to English for the purpose of satisfying its AML requirements.

For Panama customers either there was no information on source of wealth and funds or very limited information which was not adequate to meet the AML requirements. The information in the customer files was inadequate many companies listed in the documents had either been liquidated or were in the process of liquidation, the financial information was more than five years old, the documents had information on companies with the beneficial owners of the Panama customers owned shares but it did not specify the entitlement.

4 Source of Funds: UIB relied on internet searches to enquire on sources of funds of Panama customers or beneficial owners of Panama customers. These searches were in Italian and had no translation.

5 Source of Wealth: Customer files stated the source of wealth as personal savings, entrepreneurial activities or salaried activities. UIB did not go further to verify and document the proof of understanding the source of wealth of the customers or beneficial owners.

6 Enhanced due diligence: UIB assigned High risk rating to all of its Panama customers and as a result it was required to do an Enhanced Due Diligence (EDD). UIB failed to undertake sufficient EDD for its high risk customers.

7 Ongoing customer due diligence: Until June 2014, UIB had no process in place to monitor transactions on customer accounts. In June 2014 a procedure was put in place for transaction monitoring which required the Relationship Manager to complete a form and submit to the Compliance Officer. This procedure remained inadequate as the forms were not completed in timely manner and there was no provision to conduct due diligence on the remitter of payments into customer accounts where the remitter is a third party.

8 Initial deposit for high risk customers: For two Panama customers, UIB received the initial deposit into the customer’s account from a third party which contravened the AML rule which require that the customer makes his first payment through a bank account in his name or its beneficial owners name.

As a result of the findings above the DFSA considers that UIB failed to act with due skill, care and diligence and did not have adequate systems and controls to ensure that it complies with legislation applicable in DIFC. It is important for firms to ensure that customer due diligence is complete, is translated to English where required, and provides sufficient information as to the source of the Customer’s wealth.

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

Middle East Regulatory Developments


  • Sanction Relief For Iran?
  • Implications of Basel III
  • Regulatory Changes Increase Need for Compliance Staff
  • Financial Stability Board
  • Ongoing Financial Concern for United Insurance Company
Sanction Relief for Iran?

In April 2015, under a framework agreement reached between six major powers and Tehran, Iran agreed to limit its sensitive nuclear activity in exchange for sanctions relief. Iran is eager for sanctions to be lifted so it can draw in foreign companies and attract investment to upgrade its long-neglected energy sector.
However, major banks, wary of heavy U.S. penalties, will still be reluctant to restore ties with the region even if sanctions are soon eased. The major international banks, mostly European, have been stung by U.S. penalties for sanctions totalling nearly $14 billion since 2009.

Banks recently hit by penalties include BNP Paribas and Commerzbank while several others including Deutsche Bank, Societe Generale and Credit Agricole are currently under investigation. Crucial details however, including the timing of sanctions removal, still need to be established ahead of the end of June deal deadline.

Implications of Basel III

The latest risk framework, Basel III, is designed to prevent economic shocks and tightly governs how much risk banks can take on and the measures which they must have in place.

Banks in the Middle East were not guilty of the same excesses as their international counterparts prior to the crisis, but the interlinked nature of the global economy means that they’re not immune to system shocks. The new rules outline how much capital an institution must hold, expressed as a ratio of their risky exposures, to a greater emphasis on risk management practices. The new Basel framework will irrevocably change the banking landscape, and will likely make the cost of banking rise.

Under Basel II, companies had to retain capital reserves of only 4.5 per cent of core equity balanced against their risky assets, under the new rules capital levels could be as high as 15 or even 18 per cent. The exact ratio depends on the central banks, who have the power to impose additional requirements, such as a countercyclical buffer that forces lenders to hold extra capital during times of high credit growth. In addition, individual banks, deemed “systemically important” by regulators, will also have to hold higher levels.

Regulatory Changes Increase Need for Compliance Staff

Compliance costs for banks in the Middle East are soaring, as a global crackdown on money laundering and higher international capital requirements squeezes their resources.

The driving forces behind this increase in cost include the implementation of the US Dodd-Frank Act, a major legislative response to the 2008 subprime mortgage crisis; updates to the Foreign Account Tax Compliance Act (FATCA); and Basel III, a new global standard of risk management that requires banks to hold more high-quality capital as a buffer against losses.

Greater enforcement of the Anti-Money Laundering Countering the Financing of Terrorism Act (AML-CFT), a US measure to ensure that bank funds do not end up in terrorists’ bank accounts, also means that the UAE’s banks must be particularly careful to scrutinise their international payment systems.
Since UAE banks clear large volumes of trades in dollars through New York, they are forced to follow US rules.

Financial Stability Board

The Financial Stability Board (FSB) has proposed adding big asset management firms such as Fidelity, BlackRock and Pimco, to a global list of non-bank institutions whose failure could threaten the global financial system, potentially resulting in costly capital buffers and other requirements.

In January 2014 the FSB along with International Organisation of Securities Commissions (IOSCO) published a consultation designed to expand this list beyond the banking and insurance sectors, to potentially include asset managers and other financial firms.

In response to the industry outcry, the FSB and IOSCO published a revised consultation in March 2015 refining its assessment methodology, but asset managers are still fighting the proposal which could see them subjected to expensive capital requirements and structural changes which they say would distort the competitive landscape and hurt end-investors. The consultation closed on May 29.

Ongoing Financial Concern for United Insurance Company

United Insurance Company (UIC) recently announced a first-quarter loss of Dh7.1 million, compared to a loss of Dh9.1m a year earlier. This is mainly thanks to a Dh3.5m gain on the sale of some of its investments during the first three months of the year. UIC remains in difficulty however, with its accumulated losses deepening to Dh80.5m at the end of March 2015, compared with Dh14.3m a year earlier.

The insurer has, since September 2014, been in breach of UAE companies’ law that requires a company’s accumulated losses not to exceed 50 per cent or be less than its share capital.

UIC’s stocks have not traded since April last year and the shares remained unchanged yesterday on the Abu Dhabi Securities Exchange at Dh2 each.

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

International Developments


  • FCA Consult on Case to Regulate Binary Options
  • European Commission Imposes Deadline on Recovery and Resolution Implementation
  • FINRA Revise Sanction Guidelines
FCA Consult on Case to Regulate Binary Options

Binary Options are “bets” that allow consumers to speculate on the short-term movement in stock, commodities, currencies, indices or indeed any other product that can be measured in financial terms. In essence, the consumer can speculate whether a product will be higher, lower, or the same value in 5 minutes time, for example.

Currently, Binary Options trading is regulated by the Gambling Commission in the UK, providing that the firm in question has remote gambling equipment residing in Great Britain. The UK Government is considering whether the regulation of Binary Options should fall under the remit of the FCA, in order to afford consumers more protections.

European Commission Imposes Deadline on Recovery and Resolution Implementation

The European Commission have set a deadline for 11 countries to effectively implement the Banking Recovery and Resolution Directive (BRRD). The following countries failed to implement the BRRD in time: Bulgaria; the Czech Republic; France; Italy; Lithuania; Luxembourg; the Netherlands; Malta; Poland; Romania; and Sweden.

The BRRD is seen as a centrepiece to ensure a stable and safe Eurozone banking framework, following the well-publicised failings of the Eurozone banks during and following the financial crisis. The Directive provides competent authorities with powers to mitigate and manage the distress or failure of banks or large investment firms in all EU Member States to ensure that banks on the verge of insolvency can be restructured without taxpayers having to pay.

The original deadline was 31st December 2014, though the eleven states listed above now have two months to implement the BRRD.

FINRA Revise Sanctions Guidelines

FINRA’s National Adjudicatory Council has revised it sanctions guidelines to include specific violations of misrepresentation and suitability rules, as well as committing fraud.

The revised Sanction Guidelines now advise FINRA adjudicators to “strongly” consider barring an individual respondent, or expelling a firm, for cases involving fraud. For individuals who violate FINRA’s suitability rule, the range of the suspension has increased from one year to two years, and adjudicators are advised to strongly consider barring an individual respondent where aggravating factors predominate over mitigating ones.

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


Financial Crime Update


  • Australia Gets Tougher on Financial Crime
Australia gets Tougher on Financial Crime

The Australian Government has announced that it is establishing a taskforce to fight against superannuation and investment fraud, identity crime, and tax evasion.

It will provide $127.6 million over four years to aid financial investigations and prosecutions. The aim is to build on the success of a similar taskforce known as Project Wickenby, a cross agency task force fighting against tax evasion, avoidance, and crime, that has so far collected $2.1 billion in tax liabilities, as well as increased tax collections as a result of improved compliance behaviour. To date, 76 individuals have been charged with serious offences and there have been 44 criminal convictions. The Government said the new taskforce will also help ensure all taxpayers pay their fair share of tax.

Treasurer Joe Hockey said "This type of crime poses a genuine threat to national security and to the integrity of Australia's economy, financial markets, regulatory frameworks and tax revenue collection,"
The new taskforce will include the Australian Taxation Office, Australian Crime Commission, Australian Federal Police, Attorney-General's Department, Australian Transaction Reports and Analysis Centre, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions and Australian Customs and Border Protection Service.

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

Enforcement Action


  • Barclays fined $2.4 billion for FX Rigging
  • FinCEN Announces First Civil Enforcement Action Against Virtual Currency Exchanger
  • FCA Fines Individual £290,000 over Suitability Failures
Barclays Fined $2.4 billion for FX Rigging

Barclays Plc has been fined $2.4 billion by U.S. and British authorities for manipulating foreign exchange rates. Eight employees were also fired as a result of the settlement.

The bank will pay a record $441 million to the UK’s Financial Conduct Authority, $710 million to the U.S. Department of Justice, $485 million to the New York Department of Financial Services (NYDFS), $400 million to the Commodities Futures Trading Commission and $342 to the U.S. Federal Reserve.

Barclays was the last of six banks to be fined a total of $5.7 billion for the currency rigging scandal of which the FBI said involved criminality “on a massive scale”. HSBC, Royal Bank of Scotland, UBS, JPMorgan and Citigroup all settled with the authorities in November 2014. Barclay’s fine was significantly higher than the other banks as it did not take part in the group settlement in November. The bank pulled out of the November settlements at the last minute because it was unable to agree a deal with the NYDFS, which was not investigating the other companies. This meant that Barclays missed out on the 30% early settlement discount the other five banks received.

Barclays had set aside $3.2 billion for potential fines related to past FX trading. It could face further punishment related to electronic systems used in FX trading, which the NYDFS said it will continue to investigate.

FinCEN Announces First Civil Enforcement Action against Virtual Currency Exchanger

The Financial Crimes Enforcement Network of the US Treasury Department (FinCEN), in coordination with the US Attorney’s Office for the Northern District of California (USAO), announced a civil monetary penalty of $700,000 against Ripple Labs, Inc. (Ripple Labs) and its subsidiary XRP II, LLC (XRP II) for violations of the Bank Secrecy Act (BSA).

FinCEN is a bureau of the United States Department of the Treasury that collects and analyses information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. This fine represents the first BSA enforcement action against a virtual currency exchanger by FinCEN.

The BSA requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.

According to FinCEN, in its early days Ripple Labs functioned as an unregistered money service business and neglected to comply with anti-money laundering regulations. The civil money penalty against Ripple Labs and XRP II, was jointly issued by FinCEN and the USAO.

The enforcement action follows guidance issued by FinCEN in March 2013 clarifying that the BSA and its regulations applied to participants in the virtual currency industry and, more specifically, that “exchangers” and “administrators” of virtual currencies were required to register with FinCEN as “Money Service Businesses” (MSB). According to the Settlement Agreement, Ripple Labs operated as an MSB without registering with FinCEN and continued to engage in covered activity after the FinCEN guidance was issued. The BSA further requires MSBs to implement anti-money laundering (AML) programmes, report suspected suspicious transactions over $2,000 and adopt certain “Know-Your-Customer” (KYC) procedures. FinCEN claim that Ripple Labs and XRP II failed to maintain appropriate AML procedures as well as to report suspicious activities to the authorities.

By way of example, in September 2013, XRP II, negotiated a $250,000 transaction for the sale of virtual currency by email and agreed to dispense with its KYC requirements when the customer objected to providing information. In November 2013, XRP II rejected a $32,000 transaction because of concerns over the legitimacy of the overseas customer’s source of funds, but failed to file a suspicious activity report (SAR).

FinCEN Director Jennifer Shasky Calvery said in a press release. "Virtual currency exchangers must bring products to market that comply with our anti-money-laundering laws," "Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products."

FCA Fines Individual £290,000 over Suitability Failures

The UK’s FCA has fined Paul Reynolds £290,344 and banned him from performing any function in relation to regulated activities on the basis that he is not fit and proper because he lacks integrity.

According to the FCA, between 2005 and 2010, while he was an approved person at Aspire Personal Finance Limited, Mr Reynolds recommended a number of complex and high risk products to his clients, many of whom were on low incomes and had little or no investment experience. Mr Reynolds was aware that he could not justify the suitability of these products for his clients.

In some cases, Mr Reynolds’ clients were unaware that they had invested in unregulated collective investment schemes (UCIS) and were not told of the associated risks. Suitability letters found on the clients’ files, which did explain the risks, had not been sent to the clients.

The FCA said that during its investigation, they found that Mr Reynolds:

  • recklessly recommended high risk investment products to eight retail clients, when he was aware that he could not justify their suitability;
  • was involved in retrospectively creating documents which explained the risks of the products for client files and represented that they were contemporaneous and had been sent to his clients;
  • was involved in retrospectively creating signatures purporting to be the signatures of two clients on sophisticated investor certificates to suggest that UCIS products could legitimately be promoted to them;
  • was involved in producing inflated valuations to conceal the poor performance of the investments that he had recommended;
  • made investments on behalf of two clients without their knowledge or authorisation; and
  • was involved in submitting loan facility and investment applications, on behalf of a number of his clients, which contained inflated incomes and other false and misleading information.

Georgina Philippou, acting Director of Enforcement and Market Oversight at the FCA said:
“People should be able to trust advisers to recommend products which will suit their needs. Today’s fine reflects the fact that we will not hesitate to take action against firms or individuals who fail to put the best interests of their clients first.”

It is becoming apparent that Suitability is very much on the radar of European and Middle Eastern regulators. The volume of enforcement action relating to suitability has been increasing in the UK over the past few years. Meanwhile in the DIFC, the DIFC Court of First Instance recently saw a landmark case ruling against a DIFC Company for issues involving suitability. Shortly after the ruling, the DFSA announced that it will be focusing on suitability throughout 2015 and that the regulated DIFC community can soon expect a thematic review on suitability as well as legislative changes.

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

CCL Business Update


  • CCL Form Strategic Alliances in USA and KSA
CCL Form Strategic Alliances in USA and KSA

CCL has formed strategic business alliances in the USA and the Kingdom of Saudi Arabia, with Ascendant Compliance Management and Kubernao GRC Advisors, respectively. Ascendant Compliance Management, with offices in New York, San Francisco and Connecticut, are a US-based compliance consultancy advising and educating the investment, broker-dealer and fund industries. Kubernao GRC Advisors are the first dedicated GRC consultancy in Saudi, and have expertise in local regulatory requirements, as well as international best practices.

These alliances are designed to provide a wider platform of support for our clients across the globe, ensuring that our clients can leverage the full skill set, depth of resource deep regional knowledge across the partnership.

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

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