(a) Brief overview of the Banking Sector
The banking sector in Kuwait is regulated and supervised by the Central Bank of Kuwait (CBK). The role of the CBK includes issuing the Kuwaiti Dinar (KD), securing its stability, directing credit policy in the country with the aim to assist the social and economic progress and the growth of national income and acting as the government banker among other things. The CBK also has the authority to issue instructions to banks in Kuwait as it deems necessary in order to regulate the banking sector and ensure the sound progress of banking business in the country. These instructions include; maximum limits for credit concentration, banks’ credit policy, credit facilities classification, interest rate ceilings, fees and commissions to be charged to customers by the banks, consumer loans, capital adequacy, corporate governance, etc. In addition, the CBK has the mandate to issue regulations relating to banks’ liquidity and solvency, particularly in respect to the ratios to be maintained by banks and relating for example to the ratio of the banks’ own funds to their liabilities generally or banks’ own funds to liabilities arising from acceptances and guarantees, etc. The CBK is further mandated with the inspection of banks, investment companies carrying out financing activities, and institutions subject to its authority and any Kuwaiti bank subsidiaries abroad. While conducting its supervisory role, the CBK is permitted to access the accounts, books, records, and all documents that may be required for it to carry out its mandate.
(b) Branches of Foreign Banks in Kuwait
Foreign banks are now permitted to open more than one branch in Kuwait (pursuant to Law No. 4 of 2014 issued in January 2014). In March 2014, the CBK issued new instructions amending the regulations previously issued in respect to the opening of branches of foreign banks in Kuwait. In order to open up a branch of a foreign bank in Kuwait, that bank should be regulated by regulatory authorities in its country of incorporation, a have good reputation and a good credit rating (this includes banks operating in the GCC). All branches of a foreign banks are treated as one bank, and are only allowed to engage in activities that the original branch was licensed to engage in by the CBK.
In order for a foreign bank to open more than one branch in Kuwait, it must designate a branch as its head office. The manager of this head office then must submit a written application to the CBK, attaching a feasibility study and the justifications for opening another branch. The study shall include the following information: (a) proposed location of the branch, justifications of choosing the area, (b) the banking activities the branch will be running; (c) impact of the branch’s activity on the head office’s activity in Kuwait and on the bank in general; (d) cost of establishing the branch and the financial estimates for the performance results for three years in light of the expected volume of the branch’s activity (e) a letter from the foreign bank’s head office (in its country of incorporation) authorizing the head office’s manager in Kuwait to take the necessary procedures for opening the new branch; and (f) any other factors the foreign bank has taken into consideration when it decided to open the branch.
The CBK when considering an application for opening an additional branch of the foreign bank, will evaluate the overall position of the head office and its branch(es) in Kuwait, the efficiency of its operations systems and the extent to which it abides by the laws and supervisory instructions issued by CBK. The CBK will also verify that there are no significant violations on the part of the head office and its branch(es) in Kuwait.
The CBK may in its discretion increase the KD 15 million capital requirement for the foreign bank depending on the number of branches that have been approved to be opened in the Kuwait.
Branches of foreign banks licensed to operate in Kuwait may practice licensed banking activities pursuant to the provisions of the Law 32/1968 concerning Currency, the Central Bank of Kuwait and Regulations of the Banking Business and amendments thereto and within the permissible activities of such banks under their articles of association, and in accordance with these principles, rules and regulations and regulations laid down by CBK with respect to operation of foreign banks’ branches in Kuwait.
(c) Representative Offices of Foreign Banks In Kuwait
Representative offices of foreign banks in Kuwait may only practice the following activities: (a) promote the services provided by the foreign bank to which the representative office is affiliated with in Kuwait; (b) provide its head office (the foreign bank) with information and data pertinent to economic and financial developments in the State of Kuwait; including conducting studies on these developments, provided that such information is allowed to be accessed or published; (c) provide data to local companies that seek to develop their activities with the countries in which the foreign banks licensed to open representative offices operate; (d) provide advice to the entity which the office represents as well as to its clients abroad on investment opportunities available in Kuwait.
Foreign banks are also now permitted to open representative offices in Kuwait. A foreign bank which wishes to open a representative office in Kuwait should be regulated by regulatory authorities in their countries of incorporation, have a good reputation and good credit rating.
Representative offices of foreign banks in Kuwait are prohibited from (a) having the generation of profits as an objective; (b) practicing banking or financial activities and may not particularly accept deposits, extend loans, open documentary credits or issue letters of guarantee; (c) running financial brokerage activity or commercial activity, including commercial agents’ activities; (d) using any word or phrase in its advertisements or correspondence that indicates that it carries on banking business or any banking activity.
(d) Anti-Money Laundering
The banking sector in Kuwait is subject to anti-money laundering legislation. Money laundering, counter-terrorist financing and related activities in Kuwait are regulated primarily by Law No. 106 of 2013 regarding the Combating of Money Laundering and Financing of Terrorism (the “AML Law”). The AML Law in Kuwait is applicable to all financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs).
Under the AML Law, a financial institution is defined as any person that carries out as a business one or more of the following activities or operations for or on behalf of a customer: (a) acceptance of deposits and other repayable funds from the public, including private banking; (b) lending; (c) financial leasing; (d) money or value transfer services; (e) issuance and managing means of payment (e.g. credit and debit cards, traveller’s cheques, money orders and bankers’ drafts, electronic money); (f) financial guarantees and commitments; (g) trading in money market instruments including cheques, bills of exchange, and certificates of deposit, foreign exchange, exchange, interest rate and financial index instruments, transferable securities and financial derivatives and commodity futures trading; (h) foreign exchange transactions (i) participation in securities issues, and provision of financial services related to such issues; (j) individual and collective portfolio management; (k) safekeeping and administration of cash or liquid securities on behalf of other persons; (l) underwriting and placement of life insurance and other investment related insurance; (m) investing, administering or managing funds or property on behalf of other persons, and any other activity or transaction specified by Ministerial Resolution.
The AML Law requires financial institutions to adopt and implement certain KYC, risk management, suspicious transaction monitoring, and compliance monitoring mechanisms in accordance with its provisions. The AML Law was enacted to provide a more robust regulatory regime to counter money laundering and financing of terrorism in Kuwait. The AML Law is implemented by executive regulations that were issued under Ministerial Resolution No. 37 of 2013. Counter-terrorist financing (CTF) is additionally governed by Law 85 of 2013 Approving Kuwait’s Accession to the International Convention for the Suppression of the Financing of Terrorism.
Under the AML Law, money laundering is deemed to have occurred where a person intentionally disposes of funds that he knows was generated from a crime by any of the following means (a) converting, transferring or replacing these funds for purpose of concealing or disguising the illegal source of such funds, or assisting any person who participated in committing the original crime from which the funds were generated to escape legal consequences of his or her act; (b) hiding or concealing the real nature of the funds, their source, place, manner of disposing of them, movement, ownership or the rights attached to them; and (c) gaining, possessing or using these funds. A person is liable under the AML Law for any money laundering crime as specified above if such crime is perpetrated in his name or on his account.
With regards to the financing of terrorism, under the AML Law, a person is deemed to have financed terrorism if he has voluntarily directly or indirectly attempted to provide or raise funds for the purpose of using such funds to commit a terrorist act, or provides or raises funds whilst knowing that such funds will finance a terrorist act, or a terrorist organization or person. The crime will be established irrespective of whether the terrorist act occurred or not, whether the funds were used to execute or attempt to carry out such act, regardless of the country in which they were committed.
The anti-money laundering and counter-terrorist financing legal regime in Kuwait is supplemented by the recent amendment to the laws regulating capital markets in Kuwait. The Capital Markets Authority (“CMA”) in Kuwait recently issued decree 72 of 2015 (the “Amended CML Bylaws”) which amended the executive regulations to Law No. 7 of 2010 (the Kuwait Capital Markets Law, the “CML”). The Amended CML Bylaws impose additional obligations on Licensed Persons (defined below) with respect to combating of money laundering and financing of terrorism. The new regulations are intended to (i) enhance the integrity and credibility of the capital markets; and (ii) to protect Licensed Persons and their customers.
“Licensed Persons” are defined in the Amended CML Bylaws as natural or corporate persons that have a license from the CMA to practice any of the following: (a) securities exchange (b) clearing agency (c) investment portfolio manager (d) collective investment schemes (e) investment manager (f) subscription agent (g) custodian (h) broker registered with the CMA (i) investment controller, (j) credit rating agency (k) appraising assets and (l) any other activities designated as securities activities by the CMA (“Securities Activities”). We note that Licensed Persons under the Amended CML Bylaws are considered as “financial institutions” under the AML Law. It is therefore arguable that Licensed Persons must implement both the AML Law and the Amended CML Bylaws in order to be compliant with AML / CTF regulations in Kuwait.
(e) Pledges Over Shares in Listed Companies
Whereas previously, enforcement of a pledge over listed shares required a court order, the Amended CML Bylaws provide an exception to this rule. The CMA Bylaws provide that where a borrower is a professional customer and is dealing with banks or financial institutions, the restrictions on sale or acquisition of the securities outside the court do not apply. Therefore, it is now permitted (and required) pursuant to the CMA Bylaws that a pledge agreement provides whether the pledgee has agreed that the pledgor acquires or sells the securities in the event of default by the pledgor.