DIFC and DFSA Latest Developments

The Dubai Financial Services Authority (DFSA) has announced the expansion of its Innovation Testing Licence (ITL) programme in response to continued interest in financial technology (FinTech) and the digital economy. The ITL programme enables firms to test innovations in FinTech in or from the Dubai International Financial Centre (DIFC).

There are now two cohorts for the DFSA ITL application process.

Cohort 1 is made up of six companies who will begin the ITL application process. The process will include the development of a regulatory business test plan describing the proposed business model, product or service.

The DFSA will navigate the ITL process with applicants and should they be successful, they will begin a testing period lasting up to 12 months. Subsequently if they have met the predetermined conditions of the authorisation they will obtain a full license.

Cohort 2 applications open in September 2018 and coincide with the second edition of the DIFC’s FinTech Hive accelerator programme. The programme lasts 12 weeks and provides mentorship from the FinTech Hive partners. In order to enter the accelerator programme there are certain eligibilities that companies need to meet:

  • That it is not an established, public/listed or well-known FinTech business
  • It needs to have a minimum alpha or beta product to demonstrate and should be prepared to share access to programme partners under NDA (and where reasonable, for no additional cost)
  • That the senior team (e.g. Founder/CEO &CTO/Lead Developer) can commit to being based in Dubai throughout the 12-week programme
  • It should show that access to senior-level executives in the financial services firms will have a meaningful impact on its growth prospects

CCL Limited have partnered with the DIFC’s FinTech Hive as the only Compliance Partner. CCL will be providing consultancy services to participants of the accelerator programme in the form of training and by hosting a regulatory clinic in which participants can schedule an appointment and receive customised regulatory advice in relation to their FinTech offering.

The DFSA has published its 2017 Annual Report reflecting on the achievements in the previous year and looking forward to its growth and plans for the year ahead.

The 2017 report focused on FinTech Innovation, DIFC Growth, Facilitating Dubai’s Islamic Economy Initiative, helping to build the South-South trade corridor, DFSA’s Regulatory Philosophy and International Engagement, Cooperation with UAE Federal Regulators and Developing UAE Talent.

Regulatory spotlight is currently focused on FinTech Innovation and as such, the DFSA announced its FinTech Hive programmes. Furthermore, the Governor of the DIFC has announced a USD 100 million fund to help establish, grow and upscale start-up and early stage FinTech firms looking to access the Middle East, Africa and South Asia (MEASA) markets. The report reflects on the launch of the DFSA ITL, and showcases that the DFSA is the first in the GCC region to formalise a tailored regime for loan-based and equity based crowdfunding platforms.

The report also confirmed that the DFSA’s approach to the FinTech industry is consistent with its risk based approach to regulation and that the DFSA is in line with its three strategic themes outline in its 2017/2018 Business Plan: delivery, sustainability and engagement.

The DFSA has released Consultation Paper No.119 ‘Changes to the Protected Cell Company (PCC) & Investment Company (IC) Regulations.’

The Consultation Paper outlines the proposed changes to the current Companies Regulations relating to PCCs and ICs. The regulations apply to Insurers, those using the PCC structure and a Collective Investment Fund, and companies using the PCC or IC structure.

The proposals are designed to update the current versions of the PCC and IC Regulations in line with:

  • the changes resulting from the new Companies Law 2018 and
  • the DFSA Funds regime applicable to Investment Companies, including the recent changes to it.

The proposals are of interest to:

  • Insurers and Fund Managers using the PCC structure
  • Fund Managers and Funds using the IC structure
  • persons proposing to establish PCCs or ICs to conduct their Insurance or Fund business
  • sponsors and managers of cells of PCCs and those who propose to become sponsors and managers
  • persons investing in or proposing to invest in Umbrella Funds or Investment Companies
  • persons acting as Fund Administrators or Captive Managers
  • other industry participants.

The DFSA has obtained judgement from the DIFC Courts’ Court of First Instance to enforce payment of a fine imposed by the DFSA on an individual.

In 2017, the DFSA took action against Mr Andrew John Grimes including imposing a fine of AED192,675 and restricting him from performing any function. The individual did not challenge the DFSA’s finding against him and failed to pay the fine by the date it was due.

The DFSA therefore commended proceedings in the DIFC Courts to enforce payment of the fine by Mr Grimes, an action that can be undertaken should an individual fail to pay any regulatory fine on time.

The DFSA has issued a Dear SEO letter which explains the UAE Government update to the list of designated terrorist organisations and groups. The May Notice requires all banks and other financial institutions, money changers, finance and investment companies operating in the UAE to take certain action in relation to accounts, investments, financial instruments, etc. held by individuals or entities appearing on the updated list.

Firms are required to take action to ensure that the named individuals or entities do not form part of the firm/business and/or client/customer base.

Authorised Persons should refer to the Dear SEO letter for required action, including a mandatory survey which needed to be completed by the 3rd June 2018.

ADGM and FSRA Latest Developments

Abu Dhabi Global Market (ADGM) has established its first representative office in Beijing, China. The representative office demonstrates the ADGM’s commitment to China and its Belt-and-Road initiative that focuses on enhancing the connectivity and co-operation along the land based “Silk Road Economic Belt” which links the markets of Europe, Africa, the Middle East, Asia.

As part of the ADGM China office celebrations, it entered into new collaborations with key Chinese authorities and institutions to augment the Belt-and-Road growth plans which include the UAE-China Industrial Co-Operation Demonstration Zone.

The representative office plays a large role in supporting the long-term growth plans of both China and the UAE, with China being the biggest trade partner of the UAE and the UAE being China’s top investment destination in the region. The UAE’s geographical and economic policy fits well into China’s growth path and plans.

The Financial Services Regulatory Authority (FSRA) of the ADGM and the Astana Financial Services Authority (AFSA) have signed a Memorandum of Understanding (MoU).

It establishes a strategic platform for the FSRA and AFSA’s teams to share expertise and relevant information, financial services legislation, regulation, and regulatory practices in each market and to facilitate cross-border group activities and supervision

As with previous MoUs, the understanding provides a formal agreement and symbolic strengthening of relationships between the two entities and are a traditional method of formalising cooperation between authorities.

ADGM and KPMG have launched the FinTech Innovation Challenge in an effort to drive innovation in the financial services industry. The challenge will primarily focus on generating real case studies in the adoption of FinTech solutions by major UAE institutions.

Part of the operations include KPMG establishing its Digital Village in the ADGM’s Innovation Centre. The Digital Village is dedicated to matching, fostering and forging innovation ventures between companies and start-ups. The platform intends to help start-ups as they look to grow to the next stage and equip corporate clients with latest innovation technologies.

Middle East Regulatory Updates

In moves to cut off funding that the U.S government claims Iran is using to fund militant activities overseas,

the United States imposed sanctions on Iran’s central bank governor and an Iraq based bank for the movement of funds to Iran’s elite Revolutionary Guard.

The US Treasury also blacklisted Ali Tarzali, assistant director of the international department of Iran’s central bank and the chairman of Al-Bilad Islamic Bank, Aras Habib.

The sanctions would not immediately affect central bank transactions, but the sanctions being re-imposed after the withdrawal of the United States from the Iran nuclear deal would affect certain US dollar transactions.

International Developments

The Financial Action Task Force (FATF) held its annual Private Sector Consultative Forum in April in Vienna, Austria hosted by the United Nations Office on Drugs and Crime.

The forum covered current AML and CTF issues that are affecting the private sector including:

  • Combating De-risking

De-risking, the practice of global financial institutions terminating or restricting business relationships with remittance companies and smaller local banks in certain regions of the world is becoming a significant FATF concern. FATF is concerned with the impact of de-risking in particular for remittance and Non-Profit Organisation sectors.  FATF stressed the necessity for constructive dialogue and engagement among various stakeholders and many private sector participants shared ideas on ways in which FATF can increase the traction and transmission of its guidance across the global network.

  • FinTech and RegTech

FATF was involved in constructive dialogue with FinTech and RegTech sectors in order to support the innovation in financial services while also addressing the challenges which may face services and those regulating financial services and supervising. The two key policy issues discussed included digital identity (ID) and crypto assets:

a. Digital Identification

Participants discussed their experiences of using digital IDs for the purpose of customer due diligence as part of the onboarding process. It was highlighted that whilst many benefited, there were also many challenges including technology risk, security risk, risk management and data use. There was discussion with FATF as to whether their recommendations would need to be clarified or changed to suit a more digital ID context and the need to support the growing use of digital IDs for the conduct of the CDD process by reporting entities.

      b. Crypto Assets

Public and private sector participants discussed the landscape for crypto assets and the extent to which the current FATF standards and guidance are adequately addressing the recent developments in this area. Many participants noted the importance of clarifying the different definitions used, the need for a co-ordinated global approach and the importance of the private and public sector continuing to engage on these issues.

  • Risk Based Approach for Securities Sector

Participants from governments and the securities sector discussed ongoing work to develop risk based approach guidance for the securities sector. Money laundering and Terrorist Financing risks which are unique to the securities sector were also discussed as well as the role of intermediation and reliance.

  • Engagement with Financial Institutions (FI), Designated Non-Financial Businesses and Professions (DNFBP) and Non-Profit Organisations (NPO)s

Governments, FI, DNFBPs and NPOs shared their experiences of ML/TF risk assessments and FATF mutual evaluations. Participants stressed the need for ongoing dialogue between public and private sector representatives, noting that the private sector is well placed to provide valuable input on the ML/TF risks within their relevant sectors.

Participants noted the need to initiate engagement with the private sector as early as possible and industry bodies and associations can play a key role in disseminating material to the relevant sectors and helping to raise awareness within the private sector about the process.

Enforcement Action

Following on from the investigation into Jes Staley’s conduct after trying to identify a whistleblower who had criticised a member of staff, the chief executive has been fined £642,000 by the Financial Conduct Authority, the UK Financial Regulator.

The previously undisclosed fine signalled the end of the investigation and is expected to be the conclusion. It signals to other companies the severity the regulators take in having proper whistleblowing conduct.

Barclays bank will also need to report annually to the regulators detailing how it handles whistleblowing after they expressed concerns about its existing systems.

VBS Mutual Bank has been fined by the South African Reserve Bank (SARB) approximately USD$195,400 for failing to comply with anti-money laundering regulations and anti-terrorist financing regulations. The bank was also given a directive to take remedial action to correct the deficiencies in its control.

Deficiencies that were identified in VBS’ systems and controls included:

  • Not identifying or verifying customers’ details
  • Failing to report certain cash transactions over R25,000 to the Financial Intelligence Centre
  • Failing to implement adequate methods in relating to the sanctions screening of customers to ensure that the bank complies with its reporting duties
  • Failing to have adequate controls and methods in place to report suspicious and unusual transactions

An investigation continues into other potential offences including corruption and fund mismanagement. 

The Latvian banking regulator, the Financial and Capital Market Commission (FCMC) has fined Meridian Trade Bank for breaches in its anti-money laundering rules.

The fine comes after inspections at the bank in 2017 uncovered serious shortcomings in its internal controls against money laundering and after Latvia’s third-biggest bank, ABLV, was accused of money laundering and subsequently closed, triggering a financial crisis in the country.

Meridian has agreed to pay the fine and pledged to invest up to 1 million euros to improve its anti-money laundering controls this year.

The Hong Kong financial regulator, The Securities and Futures Commission (SFC) has fined the investment arm of Hang Seng Bank, Hang Seng Investment Management (HSIM) with US$382,000.

The fine comes after an investigation by both the firm and regulator discovered failures to meet regulatory requirements regarding the management of cash within its funds. The SFC concluded that HSIM’s internal controls and procedures on cash management of the funds were “inadequate” and that it failed to manage and minimise the conflicting interest between the funds’ investors and its managers.

Financial Crime Updates

A former banking executive who worked for Vietnam Construction Bank embezzled $278 million where she was a senior board advisor. With help from 27 accomplices, Hua Thi Phan bought property in Ho Chi Minh City which she then later sold back to the bank at artificially higher prices.

Phan was charged with deliberately acting against state regulations on economic management and abusing trust and ordered to return the money stolen, pay additional interest, compensation, and fines amounting to more than $700 million in damages, and she was also sentenced to 30 years imprisonment.

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