DIFC and DFSA Latest Developments

The UAE has enacted Economic Substance Regulations (“ESR”) that apply in all UAE jurisdictions, including financial free zones such as the Dubai International Financial Centre (“DIFC”). Full information regarding ESR is set out in section 3.1 and in our Regulatory Insight: UAE Economic Substance Regulations.

In the DIFC, the ESR will be administered by the Registrar of Companies for all DIFC entities, including entities that are regulated by the DFSA. Firms captured by the ESR must comply with notification and return filing obligations as set out below:

  1. All DIFC entities are required to submit an economic substance notification by 30th June 2020 via the DIFC Client Portal.
  2. The UAE Ministry of Finance has issued a Relevant Activities Guide which should assist firms in determining whether their business conducts a relevant activity and falls within the scope of the ESR.
  3. Firms may also be required to file an economic substance return (“ES Return”), within 12 months of their financial year end, to demonstrate that their business meets the ESR requirements. Information relating to the ES Return will be issued in the second half of 2020.

Further details can be found in our Regulatory Insight: UAE Economic Substance Regulations – Actions for DIFC Firms.

The Dubai Financial Services Authority (DFSA) has published decision notices against two firms, Al Masah Capital Limited and Al Masah Capital Management Limited and three individuals, Shailesh Dash, Nrupaditya Singhdeo and Don Lim Jung Chiat, for breaching DFSA legislation.

Between August 2010 and June 2016, Al Masah Capital Limited, a firm registered in the Cayman Islands, carried out unauthorised financial services in the DIFC including the financial permissions “Managing a Collective Investment Fund” and “Arranging Deals in Investments”.

The firm also made misleading statements to fees in relation to funds managed by them and made unauthorised financial promotions and offers of funds in or from the DIFC.

Al Masah Capital Management Limited, a firm that was authorised by the DFSA:

  • failed to take reasonable steps to ensure that the information about fees contained in marketing materials and subscription forms was clear, fair and not misleading
  • made misleading or deceptive statements as to fees in documents relating to offers of units in funds managed by Al Masah Capital Limited

The three individuals – two of whom were authorised persons at the time - were found to be knowingly involved in the alleged breaches by the two firms.

All three individuals are now prohibited from carrying out any provision of financial services in or from the DIFC and have had financial penalties imposed on them.

Firms are reminded to:

  • Seek permission from the DFSA to vary the scope of the firm’s licence to add or remove financial services
  • Implement effective systems and controls and conduct periodic monitoring to confirm that business is conducted within the scope of the firm’s licence.
  • Provide periodic training to relevant employees to ensure they aware of the firms’ permitted business activities, including any restrictions.
  • Ensure the regulatory business plan outlines the current business activities and any proposed business activities in the next 12 months.
  • Changes to licence permissions should be reflected in the firm’s policies and procedures.
ADGM and FSRA Latest Developments

The UAE has enacted ESR that apply in all UAE jurisdictions, including financial free zones such as the Abu Dhabi Global Market (“ADGM”). Full information regarding ESR is set out in section 3.1.

The ESR applies to ADGM firms carrying on one or more “Relevant Activities” and such firms are required to demonstrate economic substance in the UAE in relation to these activities. Firms captured by the ESR must comply with notification and return filing obligations as set out below:

  1. The ES Notification must be filed by 30 June 2020 for firms incorporated prior to 30 April 2019.
  2. The ES Notification must be filed by emailing a copy of the completed and signed form to economicsubstance@adgm.com
  3. Firms may also be required to file an ES Return within 12 months of their financial year end, to demonstrate that their business meets the ESR requirements. Information relating to the ES Return will be issued in the second half of 2020.

ADGM has made changes to the following legislation:

  • Companies Regulations 2020 (repealing the Companies Regulations 2015 and its amendments)
  • Foundations Regulations 2017
  • Limited Liability Partnership Regulations 2015
  • Limited Liability Partnership Rules 2020
  • Beneficial Ownership and Control Regulations 2018
  • Real Property Regulations 2015

The main changes within the amendments include:

  • abolishing the requirement to issue paper certificates and licences moving instead to an electronic format
  • amending the scope of the definition of ‘members of the same family’ in the Companies Regulations
  • changing the term “Annual Returns” to “Confirmation Statements” and
  • removing the current prohibition for foreigners to own freehold land in Al Maryah Island

ADGM firms should review the changes and incorporate these where necessary into their policies and procedures.

Middle East Regulatory Updates

In 2019, the UAE issued the Cabinet of Ministers Resolution no 31/2019 concerning the ESR in the UAE with effect from 30 April 2019. As a member of Organisation for Economic Development and Cooperation (OECD) the UAE introduced the ESR, in response to its commitment as a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting standards, and in response to a review of the UAE tax reporting framework by the European Union Code of Conduct Group on Business Taxation (“COCG”).

Full information regarding ESR can be found in our Regulatory Insight: UAE Economic Substance Regulations.

All UAE entities will be required to:

  • submit a notification to their regulatory authority (defined under Cabinet Decision No (58) of 2019 issued on 4 September 2019) from 1 January 2020 onwards
  • prepare and submit to the same regulatory authority an economic substance declaration within 12 months from the end of their financial year (e.g. 31 December 2020 for entities with a financial year ending 31 December 2019).

It should be noted that an entity is not required to meet the EST or file an economic substance declaration for any financial period in which it has not earned income from a Relevant Activity.

Failure by an entity to comply with the regulations shall result in administrative penalties, spontaneous exchange of information with the Foreign Competent Authority (as defined in Article 1 of the Regulations), and potential suspension, revocation or non-renewal of its registration.

The Securities and Commodities Authority (“SCA”) held a meeting with Capital Markets Advisory Committee as well as market representatives to discuss the SCA’s initiatives to regulate the over the counter (“OTC”) market. SCA’s preventive and precautionary measures to limit the consequences of COVID-19 and contain its negative effects on financial markets were also reviewed.

Further recommendations were made to contain the pandemic:

  • Enabling market makers to play a more active role to help bring stability to the markets, in addition to encouraging and helping companies to go back to business
  • Reviewing SCA’s decision to extend the disclosure period as a good opportunity for companies to review their allocations and study the impacts of the various incentive packages announced
  • Changing the audit culture as auditors must keep in mind that they are appointed by the shareholders
  • Assessing the quality of the performance of auditors, in addition to reviewing the engagement letters/agreements they have entered into with public joint stock companies to identify the scope of their responsibilities
  • Audit reports must demonstrate facts and auditors must be held responsible for omitting the disclaimer statement in reports
  • Establishing an electronic connection with the UAE Central Bank and the other banks so that transactions and wire transfers can be made instantly
  • Reducing operational costs as much as possible
  • Supporting the RegTech initiative aimed at alleviating the regulatory burden on supervisory authorities
  • Using artificial intelligence systems to handle and respond to industry requests, thus saving time and effort and implementing physical distancing

The SCA also made recommendations for the OTC market highlighting:

  • The need to specify the OTC products that are to be cleared centrally
  • That a plan is developed, in coordination with the financial market, to motivate banks and forex market participants to comply with the rules and provisions
  • That central clearing counterparties have in place a collateral management system that local and government issuers go to for central clearing instead of resorting to international clearing houses
  • The need to establish trade repositories as they are a key element in regulating the OTC market

 

International Updates

The Financial Action Task Force (“FATF”) paper identifies challenges, good practices and policy responses to money laundering and terrorist financing threats and vulnerabilities arising from the COVID-19 crisis:

  • The increase in COVID-19-related crimes, such as fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, is creating new sources of proceeds for illicit actors.
  • Measures to contain COVID-19 are impacting on the criminal economy and changing criminal behaviour so that profit-driven criminals may move to other forms of illegal conduct.
  • The COVID-19 pandemic is also impacting government and private sectors abilities to implement anti-money laundering and counter terrorist financing (“AML/CFT”) obligations from supervision, regulation and policy reform to suspicious transaction reporting and international cooperation.
  • These threats and vulnerabilities represent emerging money laundering (“ML”) and terrorist financing (“TF”) risks. Such risks could result in:
    • Criminals finding ways to bypass customer due diligence measures
    • Increased misuse of online financial services and virtual assets to move and conceal illicit funds
    • Exploiting economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds
    • Increased use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds
    • Misuse and misappropriation of domestic and international financial aid and emergency funding
    • Criminals and terrorists exploiting the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries
  • AML/CFT policy responses can help support the swift and effective implementation of measures to respond to COVID-19, while managing new risks and vulnerabilities. These include:
    • Domestic coordination to assess the impact of COVID-19 on AML/CFT risks and systems
    • Strengthening communication with the private sector
    • Encouraging the full use of a risk-based approach to customer due diligence
    • Supporting electronic and digital payment options

Firms are reminded to:

  • Be vigilant to changes in customer activity and identify unusual transactions
  • Review and update your business continuity plan and conduct regular testing
  • Review and update your Business AML Risk Assessment to address any changes to ML/TF risks
  • Review AML/CTF policies and procedures to take into account any measures introduced as a result of COVID-19, for example an exceptions process for customer due diligence.
Enforcement Action

The Securities and Exchange Commission (“SEC”) has settled charges with Ares Management LLC (“Ares”), a US private equity firm and registered investment adviser for USD$1 million regarding its failure to implement and enforce policies and procedures reasonably designed to prevent the misuse of material non-public information.

The SEC found that in 2016, Ares invested several hundred million dollars in a public company through a loan and equity investment that allowed Ares to appoint a senior employee to the company’s board.  Ares’ compliance policies did not take into account employees serving on the Board of a public company while the employee still participated in trading decisions regarding the public company. Ares obtained potential material non-public information about the company relating to changes in senior management, adjustments to the company’s hedging strategy, and decisions with respect to the company’s assets, debt and interest payments. The firm then purchased shares of this company with this information and its compliance staff did not sufficiently inquire or document whether the firm possessed non-public information.

Ares violated SEC’s compliance policies and procedures requirements and consented to a “cease and desist” order and paid a civil penalty of USD$1 million.

Firms should ensure:

  • There are adequate policies and procedures for disclosing outside business interests and that all Employees are aware of their obligations to disclose such interests.
  • There are procedures for managing conflicts of interest including for example, Chinese Walls, restricted dealing lists, dealing with non-public information, segregation of duties and requiring Employees to disclose potential conflicts of interest.
  • Employees are aware of their obligation to report suspicious activity to the Compliance Officer and MLRO.

The Chinese unit of BNP Paribas was fined 2.7 million yuan (USD$378,200) by China’s central bank, the People’s Bank of China (“PBOC”), for failure to verify client identification and report large and suspicious transactions as required. Three senior executives of BNP Paribas (China) Ltd. were also levied fines ranging from 45,000 yuan to 60,000 yuan for responsibility in the violations.

The PBOC, which has been increasing the number of sanctions on firms, also levied fines to three other financial institutions for similar violations.  

CCL Publications

Our SCA Focus Series will provide detailed guidance on the investment business regulations of the Securities and Commodities Authority of the UAE, including detailed information on the various application processes.

Issues will be released periodically throughout the year. The following issues are available now:

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