DFSA Latest Developments

Includes:

  • Amendments to DFSA Forms
  • The DFSA Publishes DFSA In Action, Volume 12, 2015
Amendments to DFSA Forms

Following DFSA forms have been amended and the updated versions are on the DFSA website:

  • AUT CORE – Applying for Authorisation- Core Information Form
  • AUT IND6- Application to extend or vary – Key Individual Status
  • SUP4- Application to vary a License
  • DNF1 - Designated Non-Financial Businesses and Professions – Registration Form
The DFSA Publishes DFSA In Action, Volume 12, 2015

The DFSA has published its 2015 external news publication – DFSA In Action, Volume 12. The key highlights are as follows:

Supervision Division
The DFSA has authorised 49 firms during the period from January to the end of August 2015, versus 37 in the corresponding period in 2014. They have accepted 64 applications in 2015, versus 51 in 2014.

The DFSA now regulates a total of 391 Authorised Firms (AFs) which should easily exceed 400 by the end of 2015. In addition to this, the DFSA has some regulatory responsibility for 16 Registered Auditors (RAs) and 97 DNFBPs.

The DFSA has issued 35 waiver/modification notices issued from 1st January to 1st September 2015.

The DFSA has 64 entities registered as a Representative Office and continue to receive such applications. DFSA is considering a thematic review of Representative Offices in late 2015 to find out if these entities are conducting the activities within their licensing remit or if they are straying into activities that need a different licence.

With the growth in business the DFSA have increased its emphasis on prudential supervision where the key areas of supervisory focus include Client Classification, Suitability, Communications/ Marketing, Financial Crime, Cyber Risks and Notifications to the DFSA relating to Market Volatility.

DFSA introduced rules requiring all Category 1 and 5 Authorised Firms to comply with the Liquidity Coverage Ratio (LCR) as per Basel III liquidity framework. The rules require a firm to maintain at all-times an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be immediately converted into cash to meet its liquidity needs for a 30 calendar day liquidity stress scenario.

In 2015 the DFSA published a report covering the first set of the new Annual AML Returns (AML Returns) submitted by AFs and DNFBPs and the overall findings of the analysis of the AML Returns.

On 15th July 2015 the DFSA published its policy approach on permissible company and trading names for entities established in the DIFC. The naming policy aims to ensure that entities operating in or from the DIFC use names that are fair and clear so as not to mislead consumers.

In August 2015, Supervision team commenced a Trade Finance themed review particularly to review:

  • Firms that are carrying out trade finance activities and their role in the trade finance cycle.
  • Obtain information and particulars about the nature and depth of trade finance activities that are being undertaken in or from the DIFC; and
  • Assess the adequacy of trade finance specific AML, CTF and Sanctions systems and controls being implemented by AFs.

Markets Division
There has been a continued flow in the number of Sukuk listings in the DIFC. Until September 2015, there were 17 new Sukuk listings valued at approximately USD 12.7 billion. The total value of Sukuks listed on NASDAQ Dubai is approximately USD 37 billion.

There has been an increase in interest for the listing of conventional debt, with a growing interest from China. There have been five conventional debt issuers including the USD 500 million issue by the Industrial and Commercial Bank of China, an issue by the Bank of China equivalent to USD 321,559,000 and USD 500 million issue by DP World.

Trading activity on the DIFC exchanges has decreased compared with the same period last year. In the first six months of 2015, NASDAQ Dubai’s trading volume decreased by 24% while the trading volume of Dubai Mercantile Exchange (DME) decreased by 25%.

Until September of 2015, The DFSA’s Markets Division approved Recognition requests from six firms that either became new members of Nasdaq Dubai or DME or expanded the scope of their business activities on the exchanges. In total, as of 30 September 2015 the DFSA had 65 Recognised Members. With respect to Recognised Bodies (i.e. exchanges and clearing houses), during the first nine months of 2015, the Markets Division has approved recognition requests for two exchanges (i.e. Dubai Gold & Commodity Exchange (DGCX) and CME Europe Limited). This brings the total number of Recognised Bodies to 9. The DFSA has also recognised its first Egyptian Member with Beltone Market Maker S.A.E being recognised to act as a market maker on NASDAQ Dubai.

Enforcements Division
The DFSA conducted 17 investigations of which 11 have been carried over from previous years.

Since the last report, the Enforcement Division of the DFSA has made decisions to:

  • Fine an authorised firm USD 8.4 million for a range of failures relating to corporate governance, systems and controls and its dealings with the DFSA.
  • A decision to restrict two individuals for a period of 6 years from performing any functions relating to the provision of a financial service in the DIFC.
  • A decision to impose a fine in the amount of USD 56,000 on a firm for its failure to have in place adequate AML systems and controls;
  • A decision to restrict an individual for a period of 3 years from performing any functions relating to the provision of a financial service in the DIFC. The DFSA also imposed a fine of USD 45,000.
  • The DFSA has also entered into two Enforceable Undertakings with two firms who did not have adequate AML systems and controls to prevent money laundering.
  • The DFSA has also issued several private warning letters to individuals who failed to meet the standards expected of them.
  • The DFSA received 154 complaints and approximately 75% of the complaints were about conduct outside of the DIFC where the DFSA has no jurisdiction.

In addition to the above DFSA has entered into three Memorandum of Understanding (MoU) with
The Australian Prudential Regulation Authority (APRA), Kuwait Capital Markets Authority (CMA) and Indonesian Otoritas Jasa Keuangan (OJK).

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

Includes:

  • Switzerland is Lifting Sanctions against Iran
  • Stiffer Penalties for Cybercrimes
  • Standard Chartered and HSBC Launch a Fresh Round of Hiring for their Compliance Functions in the UAE and Wider Middle East.
Switzerland is Lifting Sanctions against Iran

Switzerland is lifting sanctions against Iran after the Gulf state sealed a historic agreement with world powers to curb its nuclear program. Switzerland is the first nation to remove sanctions following the July 14 deal, which calls for lifting of economic restrictions on Iran in return for limits being placed on its nuclear work. According to a Swiss government statement, the decision removes a ban on precious metals transactions with Iranian state bodies and also eases/removes the requirement to report trade in Iranian petrochemical products. It also eliminates an obligation to report the transport of Iranian crude oil and petroleum products and rules on insurance and reinsurance policies linked to such transactions.
In Washington, State Department spokesman Mark Toner said U.S. sanctions remain in place and penalties would still apply to any country or company that violates them. He told reporters that the U.S. wasn’t informed in advance of the Swiss move to drop its sanctions before Iran has taken the promised steps to curb its nuclear program and before the U.S., European Union and United Nations have removed their penalties.

The Swiss government said “This agreement opens up new political and economic prospects with Iran, including bilateral relations.” The decision underscores Switzerland’s “support for the ongoing process to implement the nuclear agreement, and its confidence in the constructive intentions of the negotiating parties”. The upcoming decision regarding lifting sanctions against Iran includes increasing the threshold values for reporting and licensing obligations related to money transfers to and from Iranian nationals.

Stiffer Penalties for Cybercrimes

In Saudi Arabia, The Cyber Crimes Combat Regulation has stiffened its penalties against all kinds of electronic wrongdoing. The Cybercrimes Law provides stiff fines and jail time for electronic blackmailing and stealing from bank accounts or financial bond funds, as well as terrorist activity including hosting or designing web sites for terrorist organisations. The proposed amendments include imprisonment for a maximum period of 10 years and fines with a ceiling of SR10 million for anyone who promotes terrorist thought or organisations, publishes or transmits material that threatens public safety or religious values, or harms State interests or reputation.

The Law came into force in the Kingdom in 2007. Cybercrime is on the rise across the Middle East and in Saudi Arabia, and protecting against cyber threats is an ongoing management challenge for organisations in the country. A recent annual survey by Gulf Business Machines (GBM) has found that approximately 45 percent of IT professionals in the GCC admit that their organisations had at least one IT security incident that they were aware of in the last 12 months.

Standard Chartered and HSBC Launch a Fresh Round of Hiring for their Compliance Functions in the UAE and Wider Middle East

Following consistent pressure and focus from US Regulators on their Compliance, AML and Sanctions frameworks, both Standard Chartered Bank and HSBC Bank are seeking to increase their capacity to identify potential money laundering and have recently engaged the market to fill various roles within its organisations.

According to recent online jobs postings, Standard Chartered plans to hire several financial crime-fighting staff in the Middle East, to strengthen controls after legal and compliance problems in the United States. The bank is hiring a head of sanctions for the Middle East, North Africa and Pakistan to ensure the bank’s work complies with sanctions requirements, as well as a regional head of learning and training within financial crime compliance, and other staff within compliance, according to postings on LinkedIn.
Standard Chartered has had a tough time with US and New York authorities since being fined three years ago for sanctions-related violations. Deferred prosecution agreements from the 2012 deals remain in effect, and US prosecutors are still investigating potential violations.

HSBC launched a search this week on LinkedIn for a series of positions related to compliance and money laundering in Dubai, including a senior regulatory compliance manager based in its offices in Emaar Square. The bank is understood to also be recruiting in the wider region. These moves come after HSBC agreed in December 2012 to pay US$1.9 billion in fines to US authorities, after authorities accused the bank of failing to maintain effective anti-money laundering controls and violating sanctions law.

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

International Developments

Includes:

  • Interim Head at the UK’s FCA
  • US Regulator Recognises Bitcoins as Commodities
  • Indian Regulators Merge
  • MiFID II Final Standards Published
Interim Head at the UK’s FCA

Tracey Mcdermott, who was previously the UK Financial Conduct Authority’s (FCA) acting head, has taken over on as Chief Executive of the FCA. Ms McDermott will serve as interim replacement to Mr Wheatley, but it is thought that the Treasury will want an outsider to replace him permanently.

Mr Wheatley was forced out as chief executive after the Treasury said earlier this month it would not renew his board membership of the FCA next year. Mr Wheatley, who last week said he was “disappointed” to be leaving the FCA, has forged a tough reputation with banks following record-breaking fines for a string of City scandals such as the rigging of the Libor interest rate and foreign exchange benchmarks.

Ms McDermott’s elevation is her second promotion this year after she replaced Clive Adamson, the well-regarded Head of Supervision who left in the wake of the scandal caused by a botched 2014 media briefing that led to shares in major insurers plummeting. John Griffith-Jones, the FCA chairman, said she was the “most credible candidate” to keep the chief executive seat warm, according to board minutes.

Last year’s media-briefing fiasco was said to be one of the reasons George Osborne, The Chancellor, decided not to renew Mr Wheatley’s position. That decision came weeks after Mr Osborne promised a new “settlement” with the City, suggesting the era of tough regulation over which Mr Wheatley had presided was coming to a close. Evidence of a tough approach included record fines the FCA extracted from banks over the Libor and foreign-exchange scandals, led by Ms McDermott in her enforcement role.
Meanwhile, The Bank of England (BoE) has agreed to lend the Financial Conduct Authority one of its senior directors for a year to plug the hole left by the promotion of Tracey McDermott into the top spot. Megan Butler, who until recently was an executive director at the BoE’s Prudential Regulation Authority, will temporarily succeed Ms McDermott as Head of Supervision.

US Regulator Recognises Bitcoins as Commodities

Virtual currencies like Bitcoin just came one step closer to legitimacy in the US. As part of its first action against an unregistered Bitcoin options trading outfit, the Commodity Futures Trading Commission (CFTC) has determined that digital currencies are commodities subject to its regulations.

The Commodity Futures Trading Commission, which normally oversees the trading of metals, energy and grains on US exchanges, ruled this week that a Californian company offering option contracts on Bitcoin had broken the law, slapping it with a cease-and-desist order.

“The CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities” A CFTC press release said.

Market participants have long discussed whether Bitcoin could be defined as a commodity, and the CFTC has long pondered whether the cryptocurrency falls under its jurisdiction. The move both puts cryptocurrency on the same level as conventional commodity derivatives (like futures contracts or swaps) and rejects the notion that they're 'just' securities, like stocks. This isn't a shocking move when the CFTC had already hinted that it would rule this way, but it could mean a lot if it both gets Bitcoin exchanges off the ground and reduces the potential for abuse.

Indian Regulators Merge

The Indian commodities regulatory body known as the Forward Markets Commission (FMC) has merged with the Indian capital markets watchdog, Securities and Exchange Board of India (SEBI), with India’s Finance Minister Arun Jaitley ringing the customary stock market bell to formalise the amalgamation.

It is the first time two regulators have merged in India, but globally, barring the US and Japan, other major markets including the UK have one regulator for both securities and commodity markets.

SEBI Chairman U.K. Sinha said that the commodities market entities would get a timeframe of up to one year to adjust to the new regulations as they would have to follow the same norms that are applicable to their peers in the equity segment.

He said that the entire process has “all been very well thought out” and the regulator has also brought out a handbook for the benefit of all entities by making them aware about various rules and regulations.

The merger follows “The NSEL scam” whereby a premeditated fraud was committed in the commodity market on the Indian National Spot Exchange that is based in Mumbai, India. The NSEL is a company promoted by Financial Technologies India Ltd. The NSEL scam was a Rs. 5600 crore (around US$0.95 billion) fraud that came to light after the National Spot Exchange failed to pay its investors in commodity pair contracts after 31st July 2013.

MiFID II Final Standards Published

The European Securities and Markets Authority (ESMA) has released its final technical standards report for MiFID II and the Market Abuse Regulation (MAR), which set out how the new legislation will work in practice.

The Standards set out in the Report were the subject of a series of prior publications, including a Discussion Paper from May 2014 and two Consultation Papers from December 2014 and February 2015, respectively. In the MiFID II Report, ESMA sets out Standards covering 28 topic areas; the Report does not, however, cover all the Standards required by MiFID II and MiFIR, which will be published in due course.

Under the new MAR standards, ESMA has sought to increase investor protection by introducing specific arrangements on how to present investment recommendations or other information recommending or suggesting an investment strategy.

“The rules put out by ESMA… on MiFID II, MAR and CSDR will notably change the way Europe’s secondary markets function,” said Steven Maijoor, who chairs the authority which is charged with safeguarding the stability of the European Union’s financial system.

ESMA’s new technical standards still have to be approved by the European Commission. Once endorsed, both the European Parliament and the Council have an objection period. MAR and MiFID II will enter into force in 2016 and 2017 respectively.

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

Financial Crime Update

Includes:

  • The Wolfsburg Group Issue Business Risk Assessment Guidance and FAQs
The Wolfsburg Group Issue Business Risk Assessment Guidance and FAQs

The Wolfsberg Group, which is the Financial Crime think tank made up from 13 of the largest banks in the world, released a guidance paper outlining an effective approach to measuring and monitoring AML risk in financial institutions. Typical of the Wolfsberg Group publications, the approach is clear and easy to follow.

The guide considers the purpose and benefit of the risk assessment, and also the frequency that it should be carried out. There are also excellent insights into how the risk assessment should be organised, and who should be responsible for delivery. The guide prompts users to consider the sanctions, bribery and corruption risk a business might be vulnerable to, thus enabling MLRO’s to assess risks thoroughly.

The bulk of the paper systematically talks about the risk assessment methodology, and the individual steps to take, including the actions to take when issues are identified. The paper links the outcome of the risk assessment to the Firm’s risk appetite, which is crucial from an enterprise risk management and also from a regulatory perspective.

The guidance adds further value by providing examples of risk ratings, depending on the scenario, which will certainly help firms that are implementing the risk-based approach.

The link to the guidance is below:
http://www.wolfsberg-principles.com/pdf/home/Wolfsberg-Risk-Assessment-FAQs-2015.pdf

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

Enforcement Action

Includes:

  • Argentina Central Bank Orders Change at the Top of HSBC
  • FINRA Censures and Fines UBS for Lack of Suitability
Argentina Central Bank Orders Change at the Top of HSBC

The Central Bank of Argentina, who regulates the banking sector in the country, gave HSBC 24 hours to remove the local CEO due to significant weaknesses in controls over tax evasion and money laundering.

The source of the problem arose 10 months earlier, where the Argentinian tax authority (AFIP) accused HSBC of helping more than 4,000 customers place their wealth in Swiss bank accounts, thus evading taxes in Argentina, totalling c. US$3.5 billion.

In September 2015, the Central Bank of Argentina told HSBC that they had not done enough to prevent money laundering and terrorist financing, and as such required that the head of the Argentine business stand down. Tax evasion is a predicate offence in most countries, and therefore handling the funds would be tantamount to money laundering.

If the allegations of supporting tax evasion are correct, it could trigger investigations in many jurisdictions for Europe’s largest bank.

FINRA Censures and Fines UBS for Lack of Suitability

The Financial Industry Regulatory Authority (FINRA) censured and fined UBS Financial Services Incorporated of Puerto Rico (UBS) $7.5 million for supervisory failures related to the suitability of transactions in Puerto Rican closed-end fund shares. In addition, FINRA ordered UBS to pay approximately $11 million in compensation to customers forced to crystallise their losses in the CEF shares.

For more than four years, UBS failed to monitor the combination of leverage and concentration levels in customer accounts, which surmounts to a lack of regard to whether the investment risks were congruent to the investment profile and risk appetite of the customers. UBS should have implemented systems and controls to identify and prevent unsuitable transactions in light of the unique Puerto Rican economy, in which retail customers typically maintained high levels of concentration. Despite UBS PR's knowledge of these common practices, it failed to adequately monitor concentration and leverage levels to identify whether certain customers' CEF transactions were suitable in light of the increased risks in their existing portfolio.

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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