CCL Regulatory Update: Middle East Edition - March 2017
MENA Publications, Written by Clare Curtis
25/04/2017

1.0 DFSA LATEST DEVELOPMENTS

1.1 DFSA Issue CP No. 112

1.2 DIFCA Release CP No. 1, March 2017
1.3 DFSA Hold Outreach Session for Registered Auditors

2.0 ADGM FSRA LATEST DEVELOPMENTS

2.1 ADGM Sign CA with MAS

3.0 MIDDLE EAST REGULATORY UPDATES

3.1 UAE Central Bank Issue New Capital Adequacy Regulations for UAE Banks
3.2 Changes to Qatar’s Commercial Banking and Insurance Sector
3.3 OCB Sign MoU with CBI
3.4 UAE Push for Gender Balance

4.0 INTERNATIONAL DEVELOPMENTS

4.1 TI Report on Money Laundering in Global Real Estate Sectors
4.2 The Russian Laundromat
4.3 Australia Establish Multi-Agency Anti-Money Laundering Unit
4.4 Andorran Bank Appeal Case Against FinCEN

5.0 ENFORCEMENT ACTION

5.1 US Women Found Guilty of Financing Terrorism
5.2 FINTRAC Help to Bring Down Fraudster
5.3 CBI Issue Fine for AML and CTF Failures

1.0 DFSA LATEST DEVELOPMENTS

1.1 DFSA Issue CP No. 112

The Dubai Financial Services Authority (DFSA) has issued Consultation Paper (CP) No. 112 – Testing FinTech Innovations in the DIFC. The regulator has stated that a standalone regime is not necessary to govern this business and that it can be achieved by applying appropriate existing rules. As such, the DFSA proposes the following approach to reviewing FinTech business proposals:

Firstly, FinTech applications would need to meet the following criteria:

  • The innovative business proposition must involve the use of financial technology;
  • The business proposition must involve an activity that, if conducted in or from the Dubai International Financial Centre (DIFC), would involve the carrying out of one or more financial services regulated by the DFSA;
  • The development of the idea must have reached the stage where it is necessary to carry out ‘live’ testing with customers (whether other businesses or consumers); and
  • If tested successfully, the firm must intend to implement its business proposition, model, service or product more widely, in or from the DIFC.

The remaining steps would then be divided into four stages.

1. Welcome and Exploratory Stage
The DFSA would expect interested firms to engage with the regulator to initiate discussions about tailoring the application of the supervisory regime for the FinTech business. This having been said, the DFSA expect certain requirements to be met in any instance:

  • the fitness and propriety of the applicant;
  • the need for the firm to act with integrity;
  • the need for the firm to act with due skill, care and diligence;
  • the firm to communicate information to customers in a way that is fair,
  • clear and not misleading;
  • being open and co-operative with the DFSA;
  • having an office in the DIFC; and
  • complying with all UAE Federal Law prohibitions.

2. Application Stage
Firms meeting the above stipulations would then apply for an Innovation Testing Licence (ITL). The ITL would incorporate a number of restrictions and conditions on the activities that the FinTech firm can carry out during the testing phase. Such as:

  • restricting the business that may be carried out under the Licence to testing its product or service;
  • a requirement to include prominently on all its communications that it is ‘Regulated by the DFSA for innovation testing only;’
  • limiting the number and type of customers involved in testing of its product or service;
  • a defined timeline for testing, including clear milestones;
  • how the firm intends to ensure that customers (and other key market stakeholders) understand the nature of the testing of the model, product or service and its risks;
  • the safeguards the firm intends to put in place to ensure customers (and other key market stakeholders) are adequately protected, in the event of a problem arising from the use of the technology or failure of the business proposition; and
  • the firm’s exit strategy for an orderly wind-down in the event that its innovative business proposition and FinTech activity is not successful.

3. Testing Phase
At this stage, a FinTech firm would carry out financial services in accordance with its ITL Test Plan to develop its business proposition. This testing phase – and the subsequent simplified regulatory framework applied to firms – should be for a limited period of time only (generally six to twelve months).

4. Completion Phase and Progression to Business as Usual
Finally, the results of the testing stage would be communicated to the DFSA both during and at the end of this period. The FinTech firm should decide, based on these results, whether it wishes to apply for a full Financial Services Licence or whether it intends to cease activities in the DIFC. The DFSA would then discuss with the firm either an exit strategy or the steps needed to obtain an unrestricted licence. If the firm does become fully operational, it would ordinarily be expected to comply with all relevant regulatory requirements. However, in appropriate cases, the DFSA may consider whether further waivers or modifications are required to specific Rules.

The above approach has been detailed in a proposed new section to the GEN Rulebook and comments may be submitted until the 5th of April.

1.2 DIFCA Release CP No. 1, March 2017

The Dubai International Financial Centre Authority (DIFCA) has released Consultation Paper (CP) No. 1, March 2017 – which seeks to repeal and replace DIFC Companies Law No. 2 of 2009 with DIFC Companies Law No. 3 of 2017. The DIFCA advise that the proposed law would align with international best practice and the new/amended provisions include:

  • Abolishing the Limited Liability Company (“LLC”) regime under the Current Law and enhancing the regime for companies limited by shares by introducing a public and private company regime, which differentiates between large and small companies in terms of regulation applicable to them;
  • Departure from the requirement for an external legal opinion for amendments to articles of association, instead requiring a certificate from at least 1 Director;
  • A prohibition against a Company using a name which is reasonably likely to become misleading, deceptive or conflicting with an existing company name;
  • With regards to particulars in company communications, broadening the current provision by requiring that a Company must not include any misleading or deceptive information in its communication;
  • Requiring Annual Returns to be filed at the same time as renewing the Commercial Licence, rather than on the anniversary of incorporation or registration;
  • Introducing a new requirement for companies limited by shares to issue share certificates;
  • The Registrar to be notified of any change to the registered details of the company within 14 days of the change;
  • Introducing procedures for converting Public Companies to Private Companies, and vice versa, subject to safeguards to ensure shareholder protection in some circumstances through application to the Court;
  • Replacing the current minimum share capital requirement of US$50,000 by introducing a tailored capital requirement for public and private companies. A Public Company to have a minimum capital requirement of US$100,000, of which at least ¼ to be paid up. A Private Company to have no minimum share capital requirements;
  • A Director’s certificate relating to the solvency of the company being required before a company can redeem its paid up shares;
  • Introducing significant enhancements to the current Directors’ Duties provisions, including duties to avoid conflicts, not accept benefits from third parties and declare interests in proposed or existing transactions or arrangements.;
  • Clarification on Prohibition of Financial Assistance to a Director;
  • Introducing new “whistleblowing” provisions;
  • Making significant enhancements to the existing powers of the Registrar;
  • Prohibiting against conducting business in or from the DIFC, unless holding a Commercial Licence or permission issued by the Registrar, or exempted by the Registrar. A valid Commercial Licence to be maintained at all times;
  • Introducing provisions enabling a company to create “Treasury Shares”;
  • Introducing recognition of joint holders of shares in the Register of Shareholders;
  • Introducing a register of debenture holders;
  • Introducing new Mergers provisions;
  • Introducing new compromises and arrangements provisions; and
  • Enhancing the current procedures for a company to purchase its own shares or reduce its share capital.

The deadline for comments on the CP is 19th June 2017.

1.3 DFSA Hold Outreach Session for Registered Auditors

The Dubai Financial Services Authority (DFSA) hosted its annual outreach session for Registered Auditors last month. In-keeping with the regulator’s recent focus, the DFSA discussed the impact of technology on the audit industry and emphasised the value of data analytics for audit planning and risk assessments, illustrated by the efforts of the International Auditing and Assurance Standards Board’s Data Analytics Working Group

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


2.0 ADGM FSRA LATEST DEVELOPMENTS

2.1 ADGM Sign CA with MAS

The Abu Dhabi Global Market (ADGM) has signed a Cooperation Agreement (CA) with the Monetary Authority of Singapore (MAS) to support and promote innovative financial service initiatives – particularly with regards to FinTech – in both jurisdictions. This is in line with professed shared objectives of the ADGM Financial Services Regulatory Authority and its counterpart in the Asian region.

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


3.0 MIDDLE EAST REGULATORY UPDATES

3.1 UAE Central Bank Issue New Capital Adequacy Regulations for UAE Banks

The UAE Central Bank has shared new regulations which incorporate the capital adequacy rules issued by the Basel Committee of Banking Supervision in Basel III. It effects capital ratio requirements at a bank’s solo and group level, as follows:

  • Total capital must be at least 10.5% of the bank’s risk weighted assets (RWA) as is the sum of Tier 1 and Tier 2 capital;
  • Tier 1 capital is made up of common equity Tier 1 capital (CET1) and additional Tier 1 capital (AT1)
  • CET1 must be at least 7% of the bank’s RWA;
  • Total Tier 1 capital must be at least 8.5% of the bank’s RWA;
  • CET1 capital comprises the sum of the following items: common shares issued by a bank which are eligible for inclusion in CET1; share premium resulting from the issue of instruments included in CET1; retained earnings; legal reserves; statutory reserves; accumulated other comprehensive income and other disclosed reserves; common shares issued by consolidated subsidiaries of a bank and held by third parties, also referred to as minority interest, which are eligible for inclusion in CET1; and regulatory adjustments applied in the calculation of CET1;
  • AT1 capital comprises the sum of the following items: instruments issued by a bank which are eligible for inclusion in AT1 and are not included in CET1; stock surplus, or share premium, resulting from the issue of instruments included in AT1; instruments issued by consolidated subsidiaries of the bank and held by third parties which are eligible for inclusion in AT1 and are not included in CET1; and regulatory adjustments applied in the calculation of AT1; and
  • Tier 2 capital, for banks using the standardised approach for credit risk, comprises the sum of the following items: general provisions/general loan loss reserves up to a maximum of 1.25 per cent of credit RWA; perpetual equity instruments which are not included in Tier 1 capital; share premium resulting from the issue of instruments included in Tier 2 capital; instruments which are eligible for inclusion of Tier 2; perpetual instruments issued by consolidated subsidiaries which are not included in Tier 1 capital; and regulatory adjustments applied in the calculation of Tier 2.

3.2 Changes to Qatar’s Commercial Banking and Insurance Sector

As of the 1st of April 2017, commercial banks in Qatar will have to comply with new foreign currency open positions rules. The regulation intends to reduce associated risks by capping the amount of foreign currency assets to 30% of the bank’s capital reserves. This rule is applies to a local bank’s foreign branches (but not their foreign subsidiaries).

Elsewhere, the Qatar Central Bank has issued new instructions for anti-money laundering and counter-terrorism financing measures in the insurance sector.

3.3 OCB Sign MoU with CBI

The Oman Central Bank (OCB) signed Memorandum of Understanding (MoU) with the Central Bank of Iran (CBI) last month. The GCC country is happy to buck the global trend and is uniquely looking to Iran as a source of investment deposits; unsurprising seeing as the two nations already share “close business and diplomatic relations”. As such, the agreement seeks to enhance “financial and economic cooperation between the two countries... boost bilateral trade and include [provisions for] training... Iranian central bankers”.

3.4 UAE Push for Gender Balance

The UAE Securities and Commodities Authority (SCA) signed a MoU with the UAE Gender Balance Council which strengthens the country’s commitment to achieving fairer gender distribution and promoting greater representation of females on the boards of listed companies. The agreement included provisions for joint financial training, exchange of information and cooperation in development programmes.

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


4.0 INTERNATIONAL DEVELOPMENTS

4.1 TI Report on Money Laundering in Global Real Estate Sectors

Transparency International (TI) released a report last month – ‘Doors Wide Open: Corruption and Real Estate in Key Markets’ – which called out the governments of Australia, Canada, the UK and the US for not doing enough to mitigate money laundering activity in their real estate sectors.

TI found that Australia, Canada and the US put reliance exclusively on banks to prevent money laundering and whilst UK legislation does require realtors to carry out customer due diligence checks and suspicious activity monitoring on sellers, the same is not obligatory for buyer of property – which is where the money laundering risk is highest – which presents an easily exploitable gap in the industry’s anti-money laundering (AML) defences.

In addition, in all four jurisdictions, it was reported that offshore companies were able to purchase property without needing to identify their ultimate beneficial owners (although the UK has now committed to maintaining a central register to hold this information) and that there are no requirements for real estate professionals to have knowledge of their AML legislative obligations.

The recommendations concluded in the report seek to address these – and other – identified holes.

4.2 The Russian Laundromat

A global money laundering scheme has recently been uncovered in detail by the Organised Crime and Corruption Reporting Project, which it dubbed ‘the Russian laundromat’.

The sting, which operated between 2010 and 2014, involved laundering USD 20.8 billion out of Russia to banks in Moldovia and Latvia. From there, it was distributed to banks (including HSBC, Deutsche Bank, Bank of China, Bank of America, Danske Bank, and Emirates NBD Bank) in 96 countries across the world, including the UK, the UAE, Denmark, China, Singapore, Hong Kong, the US, the Netherlands and Germany.

Quartz news provider summarised that “under the scheme, 21 shell companies with hidden owners were set up in the UK, Cyprus and New Zealand. One company would then create a fake “loan” to another company, and a Russian firm would guarantee the loan. The shell companies would then default on the fake “loan,” and a corrupt Moldovan judge would “authenticate” the fake debt, ordering the Russian debtor to make the repayment into a Moldovan court bank account. The Russian debtor could then get the money out of the country and launder it through a host of banks throughout the world—usually going first via Trasta Komercbanka in Latvia”.

Criminal investigations are now underway to hold those firms accountable whose, supposedly stringent, anti-money laundering controls failed to identify such vast sums of dirty money infiltrating their systems.

4.3 Australia Establish Multi-Agency Anti-Money Laundering Unit

An innovative financial crime combatting unit has been established recently in Australia. Combining efforts of the nation’s big-four banks and government agencies (including the Australian Transaction Reports and Analysis Centre, the Australian Security Intelligence Organisation, the Australian Federal Police, the Australian Taxation Office, the Department of Immigration and Border Protection, the Australian Criminal Intelligence Commission and the Australian Competition and Consumer Commission), it can deliver “near-real-time financial intelligence to target and disrupt terrorism funding, major crimes and global money laundering operations”. Spokespersons for the new bureau anticipate that its effectiveness to protect the financial system is unrivalled as a result of the amassed resources and expertise.

4.4 Andorran Bank Appeal Case Against FinCEN

A case which demonstrates the significant power that may be yielded by US financial regulators, against foreign banks that come under their radar, has recently come to light as the controllers of the now dissolved Banca Privada d’Andorra S.A. seek for a ruling against the Financial Crimes Enforcement Network (FinCEN). The regulator determined the European bank as an institution of primary money laundering concern in 2015 which set in motion events that put the bank out of business. Such a label unfailingly leads correspondent banks to cut ties with offending institutions, as was the result in this instance, and the former owners of Banca Privada d’Andorra S.A. argue that this detrimental cause and effect was unjustly “based on an insufficient and inadequate investigation”.

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


5.0 ENFORCEMENT ACTION

5.1 US Women Found Guilty of Financing Terrorism

Two women from the US have been sentenced in court for conspiring to finance a terrorist group in Africa – al Shabaab. Muna Jama and Hinda Dhirane face imprisonment for 12 and 11 years, respectively.

5.2 FINTRAC Help to Bring Down Fraudster

The Financial Transactions and Reports Analysis Centre (FINTRAC) has supported an investigation conducted by a local police unit in Canada which led to the arrest of a Mr. Kenneth Van Someren on multiple fraud charges. The defendant is accused of stealing more than CAD 100,000 from the Christian Motorcycle Association – a non-profit organisation and his former employer – by way of “fraudulent e-transfers, forged cheques and illicit use of the clubs’ credit card” over a period of almost 2 years.

5.3 CBI Issue Fine for AML and CTF Failures

The Central Bank of Ireland (CBI) has fined Drimagh Credit Union EUR 125,000 for breaching anti-money laundering (AML) and counter-terrorism financing (CTF) legislation. The regulator identified that the Drimagh Credit Union had not implemented adequate policies to prevent money laundering or terrorism financing and that it failed to establish sufficient controls with regards to officers’ expenses and payments to directors.

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