Vanuatu: Law of Offshore
Banking in Vanuatu is regulated by by the Banking Act Cap 63 and the Reserve Bank of Vanuatu Act Cap 125. Until 2002 the licensing of banks was carried out by the Financial Services Commission; but in that year, in response to international pressure to control money-laundering, a revised International Banking Act was passed which handed the licensing responsibility to the National Reserve Bank.
Banks in Vanuatu need to be incorporated under the Companies Act, since International Companies are not permitted to engage in banking activity, although they can hold the shares of a company that does.
Banks operating domestically would normally use a 'local' limited company, and are called 'local' banks, while offshore (external) banks would normally use an exempted company and are called 'exempted' banks (see Forms of Company).
There are two types of license: a Financial Institution License permits most banking activities other than the operation of chequeing accounts, while a Banking Licence includes chequeing activity. An exempted bank is not normally allowed to offer chequeing, however, so the two types of license are operationally equivalent, except that a Banking Licence includes (and obliges) use of the word 'bank' in the institution's name.
Fairly stringent criteria are applied to applicants for exempted bank status, including the following:
- Minimum capital should normally be at least VT 15m in the form of cash or liquid assets, although it need not be located in Vanuatu;
- The principals or owners should have financial standing and banking experience, and this must be attested to by references;
- Documentation required includes a list of jurisdictions to be covered, police clearances for the principals, a detailed business plan, and undertakings that chequeing facilities will not be offered.
The licensing process normally takes between one and three months. A licensed and exempted bank is not prohibited from carrying out other types of trading permitted by its Memorandum and Articles.
In order to hold a license, a company does not have to be incorporated in Vanuatu, but it will be subject to all rules and statutes which the Central Bank would apply to a Vanuatu company.
The annual fee for a Banking Licence or a Financial Institution Licence is $5,000 at the time of writing.
The new 2002 International Banking Act provides an improved regulatory framework for offshore banks in Vanuatu, but imposes considerably more exacting requirements:
- Appointment of Directors and Managers is subject to review by the Reserve Bank;
- Minimum capital requirements must be suited to the proposed banking activity;
- The Offshore Bank must maintain a physical presence in Vanuatu;
- Licensees are subject to restrictions of large exposures and aggregate investments in shares issued by other companies;
- Audits by external, qualified auditors are required.
Existing Exempt Banks were obliged to re-apply for licenses by 1 August 2003.
The Banking Supervision Department (BSD) carries out the Reserve Bank’s responsibility for the soundness and stability of the financial system. There is no difference to the techniques applied to supervise domestic and offshore banks. Monitoring is conducted through both on-site inspections and off site analysis of data submitted to the Reserve Bank.
Domestic and offshore banks are required to submit monthly and quarterly data on assets and liabilities, profitability, large credit exposures and deposits, maturity profile of assets and liabilities, country exposures, exposure to related entities, capital adequacy, loan (asset quality) classification, and equity investments. In addition, domestic banks are also required to comply with compulsory public disclosure requirements designed to facilitate monitoring of the financial condition and to enhance market discipline. All banks must submit audited copies of their annual accounts to the RBV, and in the case of domestic banks published in the press, and made available to members of the public.
In carrying out its responsibilities, the BSD has issued a number of prudential guidelines, which the banks licensed under both the Financial Institutions Act and the International Banking Act are required to comply with. These include:
- Minimum capital requirement. The Reserve Bank has introduced a capital adequacy framework that is consistent with the international standard set by the Basel Committee on Banking Supervision. The Reserve Bank has the power to require a bank to maintain a higher capital ratio if it considers this appropriate when considering factors such as the bank’s risk appetite and profile. Domestic banks are required to maintain a minimum capital amount of Vt200 million and offshore must have a minimum of USD0.5 million.
- Maximum exposure limits. The maximum exposure limit to single client or group of related clients is 25 per cent of capital in relation to exposures to non-bank, non-government counterparties. This limit also applies to banks’ subsidiaries and associates. The Reserve Bank has the discretion, in exceptional circumstances, to approve exposures above this level.
- Restrictions on shareholdings. Banks require the approval of the Reserve Bank to have aggregate shareholdings in non-financial business in excess of 25 per cent of their capital. Amounts in excess of this amount are deducted from a bank’s capital base. The approval of the RBV is required prior to the establishment of a subsidiary either in Vanuatu or abroad.
- Customer Due Diligence. The objective of this guideline is to ensure that banks have in place know-your-customer (KYC) policies. KYC is most closely associated with the fight against money laundering. The Reserve Bank’s approach to KYC is from a wider prudential, not just anti-money laundering or financing of terrorism, perspective. Sound KYC procedures must be seen as a critical element in the effective management of banking risks.
- Credit Risk Management and Guidelines for Loan Classification and Provisioning for impaired assets. These guidelines set out the Reserve Bank’s minimum requirements for the classification of assets and provisions for losses.
- Supervision of the Adequacy of Liquidity of Banks. This guideline sets out the Reserve Bank’s approach to the supervision of the liquidity of banks. Under this guideline, banks are required to maintain at all times a minimum proportion of its balance sheet in specified liquid assets. At present the ratio is set at 25 per cent for domestic banks. Offshore banks are expected to have appropriate liquidity management policies to ensure that they can meet depositors’ demands.
- Relationship between banks, their external auditors and the Reserve Bank. This guideline requires banks to provide, on an annual basis, a statement from their external auditors that data provided to the Reserve Bank can be relied upon and that the bank complied with all prudential standards and requirements. Under these arrangements, the Reserve Bank may also request the bank’s external auditor to conduct a specific review of an aspect of a bank’s risk management systems or operations.