BANKING COMMISSION P.O. Box 1408 Majuro, Marshall Islands P H O N E : ( ) F A X : ( ) GUIDELINE 4

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1 BANKING COMMISSION P.O. Box 1408 Majuro, Marshall Islands P H O N E : ( ) F A X : ( ) GUIDELINE 4 REQUIREMENTS FOR THE ISSUE OF A BANK LICENSE UNDER THE BANKING ACT 1987 THE BANKING LICENSE Starting a banking operation in any new market requires analysis and planning. Prior to making an application for a license, management is consequently presumed to have made a thorough review of the potential for establishing a new bank, and in the process should pay close attention the Section 8 information requirements in the Banking Act, 1987 (the Act). The role of the Commissioner is to conduct an investigation of the documents submitted with the application for a license under Section 9, to (i) see that the relevant legal requirements have been met, (ii) review the adequacy of financial resources, organization, controls and administration for the proposed bank and (iii) assess the integrity and banking experience of the organizers. It is accordingly important that the organizers work closely with the Commissioner from the start, since the investigation cannot proceed until the documentation has been submitted to the satisfaction of the Commissioner. The Commissioner will make a preliminary review on receipt of the completed application to check the quality and completeness of the submission. In the event of deficiencies, the organizer would be promptly notified, which could delay commencing the investigation. A well-documented submission from a local source can be expected to take 90 days from the formal application date. An application by a foreign party, unless it is a well-recognized international bank and properly supervised, at the least can take twice as long. On completion of the due diligence investigation, the Commissioner with the approval of the Cabinet, shall refuse or grant the license (Section 9.2). If the decision is to refuse, no reason need be given to the applicant. Where the decision is to grant a license, it must indicate the type if banking business being approved and may specify terms and conditions, usually with the purpose of limiting the exercise of powers under the license (Section 10.1)

2 Three types of banking license are identified under the Section 11 rendering of fees for different licenses. Definitions from Section 2 have been inserted below, along with the schedule of annual fess: (i) Domestic Banking License ($7,500) - Essentially refers to the conduct of a general banking business in the Marshall Islands, essentially the acceptance of deposits and making loans and investments. A domestic bank and a branch of a foreign bank need a domestic license. Any additional branches entail an add-on fee of $1,000 per branch. For purposes of domestic license, banking business means the business of receiving funds from the public through the acceptance of money deposits which may be withdrawn or repaid by check or order, and the use of such funds either in whole or in part for advances, investments or any other operation authorized by law or customary banking practice. (Section 2c) (ii) Savings and Loan Association License ($6,000) Any such organization would likely be a locally incorporated company and be subject to the $1,000 fee on each additional branch. Reference to a savings and loan association is to a corporate or unincorporated savings association established for the primary purpose of making loans to members and others from the savings of contributors. (Section 2w) (iii) Offshore Banking License ($10,000) An offshore bank is a locally incorporated bank that conducts all its business with non-residents of the Marshall Islands. It is prevented from having any business dealings with residents as defined in Section 2u, and its license would be subject to terms and conditions defining the kind of banking business it is planning to conduct from the Marshall Islands. It is important for management to ensure that the bank is operational within six months of receiving its license. Any bank unable to open in six months risks having its license suspended and revoked (Section 13a). Likewise, management must take care to see that the bank complies with the conditions of its license, or risk the same penalty (Section 13b). Another worthy reminder for a bank that has just received its license is that a copy must be conspicuously displayed in all the places of business of the bank in the Marshall Islands. APPLICATION REQUIREMENTS An application for a license must be in writing using the English language, signed by the Chief Executive Officer, and submitted with a nonrefundable application fee of $500 (Section 8.1o) along with the following information relating to Section 8 of the Act: 2

3 1. Name and Location(s) Indicate name of the proposed bank and address where its head office will be located in the Marshall Islands (Section 8.1a). 2. Legal Documents Domestic and foreign banks are required to submit two certified copies of their Articles of Incorporation and By-Laws (Section 8.1b and Section 8.2a). A domestic bank or foreign bank subsidiary operating in RMI is required to be incorporated under the Corporations, Partnerships and Associations Act (Association Law); under the same law, a branch of a foreign bank must apply for a Certificate of Corporate Registration from the Registrar of Corporations. 3. Financial Statements A domestic bank must provide a certified balance sheet, indicating the capital invested would meet the minimum standard set in Section 20 of the Banking Act (Section 8.1g). It must in particular report the number of shares outstanding, the amount (Section 8.1c) authorized and paid-up for each class of share outstanding. The application must also indicate the financial year-end (Section 8.1i) and the independent auditor giving professional qualifications (Section 8.1h). A foreign bank applying for a license must submit its parent bank s latest annual report and audited financial statements (Section 8.2e), on a consolidated basis, and the auditor related information per the prior paragraph. In addition, a letter is required from the bank supervisory authority in the country where the bank is chartered indicating their having no objection to the proposed RMI branch (Section 8.2f). This letter should be signed by the senior executive of the foreign supervisory agency and confirm the availability of deposit insurance (see item 9). All applicants for a license will be asked to present a business plan pertaining to their first three years of operations (Section 8.1m). A suggested outline is given in the next section. 4. Shareholders Report the full names, permanent addresses, nationalities and occupations of persons who subscribed for or intend subscribing to 10% of the capital to be issued (Section 8.1d). The Commissioner will identify such additional information required to assess the financial standing, banking experience and reputation of 10% and above shareholders, directors and the principle officer of the proposed bank (Section 8.1e). These requirements would necessarily be much more demanding in the case of an application that is new to banking than one that has a solidly based reputation. Where a foreign bank seeks a license, the parent is required to report any shareholders that own more than 10% of its issued stock (Section 8.2b). In the event that there are no ownership holdings of this magnitude, enquiries will center on the size and influence of the largest shareholder(s) of the parent organization under Section 8.1p. 5. Directors Further to the detailed information applicable to large shareholders above (Section 8.1e), the investigation of directors centers of their banking 3

4 experience and financial standing (Section 8.1f), including disclosure of their other business interests. The directors and chief executive of foreign parent corporations are to be certified by the parent s secretary (Section 8.2c). In addition, any director controlling 5% or more of the parent company shares is to be separately identified (under Section 8.1p). 6. Executive Officers Information pertaining to the Chief Executive or Manager of the bank in the Marshall Islands and his deputy is the same as for each director. (Section 8.1k; Section 8.1e and Section 8.2d). A major aspect of this information relates to the banking experience of such officers, whereby the applicable curriculum vitae of the senior officers are to be submitted. 7. Business Description If the intention is to apply for a domestic license to do general banking, indicate the place(s) in which the bank intends to operate (Section 8.1m). Alternatively, if the intention is to offer broader banking services, for instance involving the exercise of trust powers (Section 8.1j), the type of related banking services are to be separately described. 8. Subsidiaries The names, addresses and types of business of prospective subsidiaries, as defined under Section 19 of the Banking Act, are to be reported (Section 8.1l). Financial statements will also be required (under Section 8.1e). 9. Deposit Insurance The potential security of depositor funds is an overriding consideration in the review of an applicant bank s business plan and other submissions, and in this regard the availability of deposit insurance (Section 8.1n). Further, the letter from their home supervisor (see Item 3) required by foreign banks should confirm the availability of deposit insurance. 10. Other Information The Commissioner is authorized to obtain any information relevant to his investigation of the above requirements in the license application process (Section 8.1p). In conjunction with the business plan (Section 8.1m), the investigation will routinely extend to corporate ownership links and any connections attributable to direct or indirect interests or close relations (Section 2f), directors or management. BUSINESS PLAN A realistic business plan is an essential prerequisite for assessing the relative merits of each application. The business plan should minimally cover the following aspects: 1. Organization Chart giving names, titles, responsibilities of all senior officers for the proposed company. In the case of foreign branch, also describe reporting lines as they relate to the head office executive structure. 4

5 2. List particulars of the services the bank proposes conducting, indicating how they will meet the perceived needs of the community. 3. Provide balance sheet and income statement projections during each of the initial three years of operations. Disposition of pre-opening costs are to be separately identified. 4. Outline the salient assumptions in support of the foregoing balance sheet and income statement projections 5. Note the amount and source of initial capital to be invested, projected capital adequacy standards and potential capital source for meeting unexpected contingencies. 6. Describe the policy framework for dividend payments to the owners of the bank, in context of the above three-year projections. In the case of a foreign branch bank operation, describe the policy framework pertaining to the reimbursement of its parent over the same period. The management of the bank concerned would be invited to amplify on the business plan in preliminary meetings with the Commissioner. Hence, the budget and the previously described information would be used to assess the application, as it relates to the character and experience of the owners and managers of the bank, ownership and control linkages, the bank s current and prospective financial condition, contingent resources available in an emergency and the likelihood of its being able to profitably meet the needs and convenience of the domestic market. The time for completion of the review by the Commissioner will depend on the quality of each bank s submissions, and ensuing level of follow-up enquiries. A reasonable target, at the outset, is that processing a local application should be accomplished within 90 days from receipt of the completed application requirements, and a straightforward foreign application within 120 days. SUBSEQUENT EVENTS Renewing the license is an annual process. The initial license is only valid to the last day in December each year, regardless of when it was initially issued (Section 10.5). Each bank must pay its annual license fee prior to the year-end expiry date (Section 10.6), or face the prospect of the license being suspended (Section 13.1h). Prior written approval from the Commissioner is required if a bank seeks to open or close a branch facility (Section 12a). The same holds for any licensed bank that wishes to open a branch, agency or representative office (Sections 12 b and c) or for a domestic bank to acquire the business of another bank (Section 12d). 5

6 The acquisition of a substantial interest (2x) in a domestic ban likewise requires prior approval (Section 12e), which refers to transactions involving 25% or more of the shares outstanding. After receiving a license to operate in the Marshall Islands, a bank is expected to provide advance notice on any substantive changes in the information submitted when applying for a license. Substantive changes in this context refer to the following sections under Application Requirements: Bank s Name of Location (No. 1). Any Changes. Legal Documents (No. 2). Namely amendments to articles of incorporation or the certificate of corporate registration. Large Shareholders (No. 4). Refers to any shareholders that directly or indirectly own 10% or more of the shares outstanding. This also applies for a parent bank. The purpose is being aware of changes in corporate ownership links and associations. Directors (No. 5). Notify on changes in directors, also at the parent company level. Chief Executive or Manager (No. 6). Provide curriculum vitae for the incoming manager of his deputy, applicable for both domestic and foreign banks operating in the Marshall Islands. Lines of Business (No. 7). Refers to implementation of new lines of business or discontinuance of an established service. Subsidiaries (No. 8). Similarly refers to a newly opened or closed subsidiary. Other (No. s 9 and 10). In particular, notify of any new supervisory initiatives that could have a direct bearing on the Marshall Islands bank, including any proposed changes in deposit insurance. All banks are expected to update their business plan annually, including a reconciliation of actual results achieved in the current year against the forecast made at the beginning of the year. This process would timed for early in the new year, set by the Commissioner in conjunction with the banks concerned. In addition, foreign banks are requested to ensure that a copy of their parent bank s annual report is sent to the Commissioner s Office as soon as it becomes available. GUIDELINE 4 WAS INITIALLY DISTRIBUTED ON NOVEMBER 25, 1994 AND IS HEREBY REVISED TO REFLECT THE ENACTMENT OF CERTAIN AMENDMENTS EFFECTIVE OCTOBER 4, 1995 OFFICE OF THE COMMISSIONER OF BANKING MAY 31, 1994 (Revised) 6

CHAPTER INTERNATIONAL BANKING AND TRUST COMPANIES ACT and Subsidiary Legislation

CHAPTER INTERNATIONAL BANKING AND TRUST COMPANIES ACT and Subsidiary Legislation CHAPTER 11.04 INTERNATIONAL BANKING AND TRUST COMPANIES ACT and Subsidiary Legislation Revised Edition showing the law as at 1 January 2013 This is a revised edition of the law, prepared by the Law Revision