DIFC and DFSA Latest Developments

The Dubai Financial Services Authority (DFSA) is participating in the first cross-border test organised by the Global Financial Innovation Network (GFIN). The GFIN was established at the beginning of 2019 and is comprised of thirty-three international financial regulators and related organisations to provide efficient ways for FinTech firms to engage with regulators across the world.

The GFIN received forty-four applications for its pilot test and eight firms were successful. An announcement with the full list of firms will be made in the second quarter of 2019. The DFSA is expected to engage further with the firms and other jurisdictions throughout the cross-border pilot testing phase.

Royal Shield Ltd’s appeal to the Financial Markets Tribunal (FMT) which followed the DFSA’s decision to withdraw its licence, has been rejected. The FMT upheld the DFSA’s decision that the firm is no longer fit and proper to hold a financial services licence.

Failings found included:

  • The firm’s failure to maintain adequate financial resources to conduct and manage its affairs properly
  • The lack of sufficient personnel, including a Finance Officer (required under DFSA rules)
  • The firm did not maintain its required business premises in the DIFC for a considerable period

The firm appealed to the FMT on 14th November 2018. The FMT is an authority independent of the DFSA and has its own rules and it may uphold, vary or cancel the DFSA’s decisions.

The DFSA has sent all Authorised Firms a Dear SEO letter reminding them of their FATCA (Foreign Account Tax Compliance Act) obligations. FATCA requires foreign financial institutions to report to the U.S. Internal Revenue Service (IRS) information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The Organization for Economic Cooperation and Development developed the Common Reporting Standard (CRS) as a global reporting standard for the automatic exchange of information. The intention being to allow tax authorities to obtain a clearer understanding of financial assets held abroad by their residents, for tax purposes.

The DIFC Common Reporting Standard Law requires firms within the centre to consider the reporting obligations under FATCA and CRS and action where necessary and submit any reporting obligations through the DIFC Portal.

Authorised Firms should continuously assess their obligations under FATCA, CRS and any DIFC specific legislation, and ensure compliance and seek legal advice where necessary.

ADGM and FSRA Latest Developments

The Abu Dhabi Global Market’s (ADGM) financial services regulator, the Financial Services Regulatory Authority (FSRA) has enhanced its guidance for the “Regulation of Crypto Asset Activities”.

The first guidance was launched in June 2018 and the regulator has continued to engage with market participants both regionally and globally to develop its crypto asset regulations. The updated guidance reinforces the FSRA’s focus on innovation and strong regulatory practices and also takes into account recent global developments such as:

  • Stablecoins/Fiat Tokens: Stablecoins that are fully backed by fiat currencies will be treated as a form of digital representation of money. Where currencies are “used as a payment instrument for the purposes of Money Transmission”, the activity will be regulated as ‘Providing Money Services’. There is also further guidance on the regulator’s approach to regulating issuers, custodians and exchanges using Fiat Tokens.
  • Custody: The guidance provides clarity on the types of crypto asset custody activities that can be undertaken and sets out FSRA expectations in terms of custody governance and operations.
  • Technology Governance: Further enhancements and clarifications have been made in relation to changes in the underlying protocol of a crypto asset that results in a fork (coding change), as well as setting out the governance and control expectations for crypto asset exchanges and licence holders.
  • FSRA Anti-Money Laundering and Sanctions Rules and Guidance (AML): As the AML Rulebook applies in full to the regulated activity of crypto asset operators/holders, the guidance has been updated with the latest local and global changes and provides further clarity on the use of new regulatory and surveillance technologies.

The FSRA is also preparing further guidance on digital securities for primary and secondary market consideration.

Middle East Regulatory Updates

The UAE’s securities and commodities regulator, the Emirates Securities and Commodities Authority (ESCA) has launched a 24-hour, 7 days a week access to its services. The system now features the ESCA’s internal procedures and serves all target groups, including brokers, investment funds, investors, financial services and stock and community markets.

The move is part of the UAE’s plans to automate regulatory procedures and access to information as well as simplifying processes for investors and customers in the UAE’s financial markets.

International News

Two months after the Danske Bank Money Laundering Scandal whereby 200 billion euros flowed through suspicious bank accounts between 2007 and 2015, the firm has made significant steps to strengthen its systems and controls. Danske Bank Executive, Phillipe Vollot has been asked by the Bank to overhaul the Bank’s compliance and regulatory controls by adding to the compliance department as well as developing specialised units in surveillance and investigations. Mr Vollot has highlighted the culture within Danske as a key weakness to the firm, stating that the previous mantra was to “execute” to drive profits rather than protect the customer and reduce money laundering risk.

The G20, the group of the twenty biggest world economies, has announced plans to implement regulations on cryptocurrencies to counter terrorist financing, beginning by shadowing the guidance set by the Financial Action Task Force (FATF). The member countries have previously stated that creating an international standard for crypto assets is necessary for sustainable growth and that they remain committed to the financial reform agenda. The countries have also highlighted that while cryptocurrencies and assets play a significant part in money laundering crimes, there is underpinning innovation which can benefit financial systems and economies.

Enforcement Action

Sixteen financial institutions have been fined by the Saudi Arabian regulator, the Saudi Arabian Monetary Authority (SAMA), for violating “principles of responsible finance”.

While the specific violations were not explicitly identified, the regulator stated, “SAMA calls upon the financial institutions under its supervision to fully comply with regulations and instructions, in a manner that does not affect the rights and interests of customers”. 

The regulator also clarified that the decision was in line to ensure the “principles of justice and transparency” are adhered to, as well as “responsible finance”.

The two UK financial services regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have fined R.Raphael & Sons plc (“Raphaels”) for failing to manage its outsourcing arrangements between April 2014 and December 2016.

Raphaels, a retail bank, operated prepaid card and charge card programmes through an outsourced service that were critical to the card operations. The firm then failed to have adequate supporting processes to enable it to understand and assess the business continuity and disaster recovery arrangements of its outsourced service providers – in particular, how they would support the continued operation of its card programme during a disruptive event.

Raphaels was fined £775,100 by the FCA and £1,112,152 by the PRA.

The regulators’ actions demonstrate the importance of firms having clear oversight of any critical activities that outsourced providers carry out for a firm. There is also a clear importance in having adequate and timely remediation should any weaknesses be identified, and governing bodies should be strong in identifying critical outsourced services and their flaws. Firms also must be responsible for carrying out initial and ongoing due diligence of outsourced service providers.

The FCA has banned Terry Farr, previously a broker for Martins Broker (UK) Ltd, from performing any function in relation to any regulated financial activity, due to acting dishonestly and lacking integrity.

Between September 2008 and August 2009, Mr Farr arranged nine “wash trades”, which are risk-free trades with the same party carried out in pairs in order to cancel each other out, and for which there are no legitimate commercial purpose.

Mr Farr dishonestly created these trades which had no legitimate commercial purpose but instead had the aim of obtaining unwarranted brokerage payments totalling £258, 151.

The FCA stated that actions like this are “motivated by greed” and had no place in financial services.

Eight people in Spain have been arrested for operating a money laundering scheme through cryptocurrencies. Europol carried out the investigation which found that the group was laundering money by exchanging illegally ‘earned’ fiat currency into crypto assets. They then used cryptocurrency ATMs and split the funds into smaller funds to introduce them into the financial system without raising suspicion. The investigation demonstrates a clear importance of transaction monitoring and raising any suspicious activity.

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