IMPLICATIONS OF THE FINANCE ACT, ACT NO. 4 OF 2012 ON COMMERCIAL BANKS

INTRODUCTION

The Finance Act, Act No. 4 of 2012 was assented to on 27^th April, 2012 by the President of Kenya. The date of commencement of its various sections has however been varied under Section 1 therefore with some sections coming into effect as from 2006.

The Act amends several statutes. Of interest for purposes of this advice is the Banking Act, Cap 488 of the Laws of Kenya.

THE AMENDMENTS

AMENDMENT I: BRANCHES AND SUBSIDIARIES

The establishment of branches and subsidiaries of banks and other financial institutions is governed by Section 8A of the Banking Act, Cap 488 of the Laws of Kenya. Section 8A (1) thereof empowers the Minister to approve applications for opening of bank branches and or subsidiaries outside of Kenya.

Section 41 of the Finance Act, 2012 now creates an additional subjection, subjection (5) which is to the effect that:

“Notwithstanding the provisions of this section, the Central Bank may, subject to such conditions or limitations as it may prescribe, permit an institution to provide SUCH SERVICES as it may, in any particular case, specify, TO ITS CUSTOMERS who are outside the country through banking institutions located outside Kenya.”

This section has a number of implications, namely:

1.       It allows the Central Bank of Kenya to permit an institution to provide such services as the CBK may approve to such institution’s customers domiciled outside Kenya through banking institutions located outside Kenya. It is opined that this section allows Kenyan banks to work with other financial institutions outside the country to facilitate provision of financial/banking services in those jurisdictions.

2.       The CBK has full discretion to determine nature of services to be offered and stipulate the conditions for and requirements for grant of such licenses. The section gives these powers to the CBK and not the Minister, as the section is not subject to any section which grants powers to the Minister.

In this regard, it’s instructive that Section 8A (1) of the Banking Act provides that “No institution shall open a branch or establish a subsidiary outside Kenya, except with the prior approval of the Minister.”

Although the application for opening branches outside Kenya is usually made through the CBK, an approval is granted by the Minister.

The amendment allows the CBK to grant approvals to any Kenyan company providing financial or banking services to provide such services through banking institutions outside the country, without need for the Minister for Finance’s approval.

3.       The Section refers to “its customers” although the work is not defined in the Finance Act. Since the Interpretations and General Provisions Act, Cap 2 of the Laws of Kenya doesn’t also define “customer”, recourse must be had to literal interpretation, and therefore customer would mean persons or entities for which customer relationship has been established, and not new or potential customers.

4.       The amendment presents opportunity for business expansion into other jurisdictions by providers of financial and banking service providers in Kenya. For instance, the CBK may now grant Co-operative Bank the power to work with other banking institutions established outside Kenya without the need for establishment of branches or subsidiaries in foreign jurisdictions.

BENEFITS OF THIS AMENDMENT

The benefits of this amendment can be summarized as follows:

a)       It eliminates the bureaucratic processes and inordinately long delays for approval of applications for grant of licences.

b)       It makes establishment of business in foreign jurisdictions cheaper as the local banks and providers of financial services such as electronic money transfer can cost-effectively contract with other banking institutions in other jurisdictions in provision of services to customers located in those jurisdictions.

AMENDMENT II: RESTRICTIONS ON OWNERSHIP OF SHARE CAPITAL OF AN INSTITUTION

Section 13 of the Banking Act deals with Restrictions on Ownership of Share Capital of an Institution – a bank or financial institution or a mortgage finance company.

A “financial institution” means a company, other than a bank, which carries on, or proposes to carry on, financial business and includes any other company which the Minister may, by notice in the Gazette, declare to be a financial institution for the purposes of Banking Act.

“Financial Business” on the other hand means:

(a)     the accepting from members of the public of money on deposit repayable on demand OR at the expiry of a fixed period or after notice; AND

(b)     the employing of money held on deposit or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money.

This definition of financial business is cumulative and for an entity to qualify as conducting a financial business, it must be able to demonstrate the performance or intention of performance of the two functions above simultaneously.

It prohibits the direct or indirect holding or having beneficial interest of more than 25 % of shares of an institution by an individual person. However, other banks, government of Kenya, government of a foreign sovereign state, State Corporation or a foreign company which is licensed to carry on the business of an institution in its country of incorporation may hold and or have beneficial interest in more than 25 % of the share capital of an institution.

Further, it prohibits FINANCIAL INSTITUTION or MORTGAGE FINANCE COMPANY from acquiring or holding, directly or indirectly, any part of the share capital of, or otherwise have beneficial interest in, any bank. As such, only banks (as an example of financial institution) may hold shares in any other bank.

Section 13 (3) of the Banking Act (as it then was) did not require body corporates holding shares in banks to disclose the beneficial ownership of shares held by them where such shares were in fact held on trust. Section 42 of the Finance Act, 2012 now amend section 13 (3) of the Banking Act by introducing the concept of “other body corporate” as part of the entities which must disclose the person in whose trust shares in banks are held, and reads:

“Where any share is held by a company, other body corporate or by a nominee on behalf of another person, the company, other body corporate or the nominee, as the case may be, shall disclose to the institution and to the Central Bank the full particulars of the individual who is the ultimate beneficial owner of the share.”

Accordingly, if corporate entities hold shares in a bank as nominees, they are now required to disclose in whose trust the shares are held.

Banks should therefore comply with this provision and advice such nominee shareholders to disclose to the bank and to the Central Bank the full particulars of the individual who is the ultimate beneficial owner of the share.

AMENDMENT III: PUBLICATION OF INFORMATION

Section 31 of the Banking Act permits the Minister or CBK to publish of information furnished to either of them so long as such information doesn’t disclose the financial affairs of any person or unless consent for which publication is obtained/granted in writing. The Section criminalized disclosure of any information which comes to the knowledge of any person in course of performance of any function under the Banking Act. The law however allows the CBK to share information with other financial regulatory authorities, within or outside Kenya for the effective performance of their distinct functions.

The law also allows CBK and institutions licensed under the Banking Act, to exchange such information as is reasonably required for the proper discharge of their respective functions subject only on to such manner and extent as the Minister may determine through regulations.

Section 43 of the Finance Act amends Section 31 of the Banking Act by including not only CBK and institutions licensed under the Banking Act, but also institutions licensed under the Microfinance Act, 2006 as authorized to share information with stakeholders in the banking and financial services industry.

Institutions licensed under the Microfinance Act, 2006 may therefore share information with other financial institutions as is reasonably required for the proper discharge of their respective functions.

CONCLUSION

We hope that the above will suffice your concerns regarding implications of the Finance Act, Act No. 4 of 2012 on commercial banks. Nonetheless, please feel free to contact us at ceo@stralexgroup.co.ke or okelloted@sichangi.com for further any further information or clarification. You may also reach us on +254 773 865 798 or +254 715 310 677.

Yours faithfully,

FOR: STRATEGIC LEGAL SOLUTIONS GROUP LIMITED

Centre for Legal Research & Policy Development – a participating consultancy in the SLS Group of consultancies.

LEGAL OPINION ON SECTION 100 (4) OF THE PUBLIC PROCUREMENT AND DISPOSAL ACT

BASIS OF JUDICIAL REVIEW

Judicial review plays an important role in our society which is to check excesses, omnipotence, arbitrariness abuse of power and also accountability and maintenance of constitutionalism and the rule of law. As Chief Justice Marshall powerfully argued in the Case of MARBURY v MADISON 5 us 137 (1803), judicial review provides the best means of enforcing the peoples’ will as declared in the written Constitution, without resort to the drastic remedy of revolution. He warned that, without judicial review, the legislative branch would enjoy a practical and real omnipotence and would reduce to nothing what is deemed the greatest improvement on political institutions - a written constitution.

Judicial review is a tool used by the High Court to ensure that public institutions exercise power in accordance with the law. It is still within the jurisdiction of the High Court to review legislation in order to establish whether it complies with the Constitution. Judicial review also enables the High Court to review acts, decisions and omissions of public authorities in order to establish whether they have exceeded or abused their power.

RIGHT TO JUDICIAL REVIEW

Section 100 (1) of the Public Procurement and Disposal Act provides that decisions of the Public Procurement Administrative Review Board are final binding on all the parties. Section 100 (2) however grants to parties a right of appeal to the High Court by way of judicial review, and the High Court’s decision is final. The application for review must be made within 14 days from the date of the Board’s ruling. Often, applicant with legal representation complies with timelines for commencing the judicial review proceedings.

SOURCE OF LAW GOVERNING PROCEDURE FOR JUDICIAL REVIEW

The High Court also has powers of judicial review arising from the Constitution, the Law Reform Act, and the supporting Order LIII of the Civil Procedure Rules.

EFFECT OF SERVICE OF NOTICE OF JUDICIAL REVIEW

Where leave to apply for judicial review has been granted by the High Court, the service of such a notice (notice of judicial review) act as a stay any action on the procurement process and the decision of the Board. It would therefore be unlawful for a procuring entity to proceed with any part of the procurement process once a notice of judicial review has been served on the procuring entity, and any action by such party purporting to proceed with the procurement process would be found null and void.

As such, a procuring entity must halt all steps concerning the procurement as soon as it receives a notice. However, any action taken before the service of notice of judicial review is valid unless otherwise reversed by the High Court exercising its judicial review jurisdiction.

LEGALITY OF SECTION 100 (4) OF THE PUBLIC PROCUREMENT AND DISPOSAL ACT

Section 100 (4) of the Public Procurement and Disposal Act provides that:

“If judicial review is not declared by the High Court within thirty days from the date of filing, the decision of the Review Board shall take effect.”

The import of this section is that judicial review proceedings must be finalized within 30 days from the date when the application for judicial reviewed was filed with the High Court.

The spirit behind this Section was to ensure that the public interest is served in the least amount of time possible and that projects are carried out expeditiously by making sure that judicial review applications are heard within 30 days from the date of filing the application. It aimed to ensure that there are no delays in finalizing the tenders intended to improve the welfare of Kenyans and that funds are disbursed expeditiously to commence the project hence the limitation of time on judicial review process which guarantees that the process is quick and efficient.

JUDICIAL INTERPRETATION OF THE SECTION

The High Court of Kenya in the case of REPUBLIC V PUBLIC PROCUREMENT ADMINISTRATIVE REVIEW BOARD AND ANOTHER EX PARTE SELEX SISTEMI INTEGRATI [2008] EKLR however found the section to be unconstitutional, and therefore null and void. Accordingly, the section is no longer operative and judicial review proceedings are litigated at the speed and discretion of the Court, subject only to constitutional and other general statutory requirements for expediency of court proceedings.

The findings of the court in the cited case, and which are applicable to the present case, were that:

1.       Neither the Constitution of Kenya, the Law Reform Act nor order LIII of the Civil Procedure Rules, put a time limit on when the High Court should determine an application for judicial review.

2.       The public interest served by the judicial review as expressed in section 65(2) of the then Constitution is to ensure that inferior Courts, tribunals and administrative bodies act lawfully, fairly, transparently and reasonably and upholding the preliminary objection would defeat that very reason;

3.       The issue of the time within which a court must determine a suit is an issue of procedure set out under order LIII of the Civil Procedure Rules which does not make any time limits on the period within which the High Court should make a decision;

4.       Section 100(4) of the Public Procurement and Disposal Act, 2005 only provides a right to relief by way of judicial review but not the procedure to be followed in judicial proceedings;

5.       The Section principally seeks to oust jurisdiction of the Court by limiting the time within it must here and determine a review application;

6.       Legislative provisions which suggest a curtailment of the courts’ power of review give rise to a tension between the principle of legislative mandate and the judicial fundamental of access to courts;

7.       The then Section 77(9) of the then Constitution (now provided for under Article 50 of the Constitution 2012) stated that:

“A court or other adjudicating authority prescribed by law for determination of the existence or extent of a civil right or obligation shall be established by law and shall be independent and impartial; and where proceedings for such a determination are instituted by a person before such a court or other adjudicating authority, the case shall be given a FAIR HEARING WITHIN A REASONABLE TIME.”

8.       Reasonable time would depend on the circumstances of the case and other relevant factors that the court must consider;

9.       The Court appreciated that one of the objects of the said Act in section 2(a) was to maximize economy and efficiency. However, while time is of essence in carrying out projects, speed cannot override justice; and

10.    Applications filed in court for judicial review are brought under sections 8 and 9 of the Law Reform Act Cap 26 Laws of Kenya and Order LIII of the Civil Procedure Rules.  Accordingly, the Public Procurement and Disposal Act, 2005 cannot purport to introduce any other procedure apart from what is known in law and practice.

CONCLUSION

In view of the above, we advice that state corporations and public bodies cannot successfully rely on section 100 (4) of the Public Procurement and Disposal Act to justify proceeding with the procurement process upon expiry of 30 days from the date of filing of the application for review, as the section has since been declared unconstitutional, and therefore null and void for all intents and purposes.

Once an application has been filed for a judicial review and the public body duly served with the same, it is best to let the court determine the matter whereafter such public body should proceed with the relevant procurement process as the High Court may direct.

We hope this opinion settles your concerns on the matter under reference and or judicial review matters generally. Nonetheless, please feel free to contact us at ceo@stralexgroup.co.ke, panam@stralexgroup.co.ke or okelloted@sichangi.com for further any further information or clarification. You may also reach us on +254 773 865 798 or +254  720 756 343.

Yours faithfully,

For: Strategic Legal Solutions Group Limited

Centre for Litigation & ADR Process – a participating consultancy in the SLS Group of consultancies.

REGISTRATION OF GLOBAL BUSINESS COMPANY 1 IN MAURITIUS

INTRODUCTION

The legal framework in Mauritius requires that Global Business Company I (GBC1s) be structured, established and administered in compliance with the Financial Services Commission’s (the “FSC”) regulations. 

The FSC provides for a distinct regime for licensing and surveillance of GBCs. As per the laws in Mauritius, a company proposing to conduct business outside Mauritius may apply to the Commission for a Category 1 or Category 2 Global Business Licence.

There is no restriction on the business activity of a GBC1. However, a licence will not be granted if activity is “unlawful or contrary to public interest or may cause serious prejudice to the good repute of Mauritius as a centre for financial services.”

A GBC1 may therefore conduct financial services (provided the relevant licence/authorization/approval /registration is obtained) or non financial services.

In light to the above, we are therefore pleased to make this proposal which covers the cost implications and conditions applicable for establishing a GBC1.

LEGAL FRAMEWORK FOR ESTABLISHMENT OF GBC1 IN MAURITIUS

Pursuant to the laws of Mauritius, a GBC1 needs to comply with the following requirements:

(a)                 it shall at all times be managed by a Management Company;

(b)                 the application for the Category 1 Global Business Licence shall be made through the Management Company;

(c)                 the company shall conduct business outside Mauritius;

(d)                it is required to have registered office in Mauritius whereby all statutory records would be kept;

(e)                 it may be incorporated with a single director and shareholder;

(f)                  corporate directors are not allowed; and

(g)                 to benefit from tax treaties, the company may apply for a Tax residence Certificate.

USES AND ADVANTAGES

A Company holding a Category 1 Global Business Licence (GBC1) in Mauritius is liable to Mauritian taxation at a rate of 15% but after application of the provisions on foreign tax credit, the rate may be reduced to 3%. Companies which are centrally controlled and managed in Mauritius can, with the approval of the Director of the Mauritius Revenue Authority, accede to the benefits of Double Taxation Agreements. Furthermore, it should be noted that there is no withholding tax on dividends, capital gains and interests.

The GBC1 needs to apply for the Tax Residence Certificate (TRC) which provides substantial weight to the tax residency of the Company in Mauritius.  Certain conditions (summarized below) need to be complied with before the Mauritius Revenue Authority issues the TRC:

·           There should be two local resident directors on Board;

·           The accounts are done under IFRS and audited by an external auditor;

·           The principal bank account is maintained in Mauritius; and

·           Physical Board meetings are held and chaired from Mauritius.

OTHER ADVANTAGES OF MAURITIUS GBC1s

·           No withholding taxes on Dividends, Royalties & Interest

·           No capital Gains Tax

·           No Tax on local Dividends but tax (effectively 3%) on foreign dividend

·           Interest earned on Deposits with Banks are tax exempt

·           Attractive Network of DTA with 36 Countries 

·           Staff are highly qualified experienced and bilingual ( English and French)

PROCEDURES FOR SETTING UP A GBC1

Step 1

Clients are kindly requested to:

1.       Propose some names for the new company;

2.       Complete and execute the Incorporation and Due Diligence Questionnaire and letter of undertaking;

3.       Provide the due diligence documents including bank reference (see section 6);

4.       Provide a business plan with a detailed structure chart;

5.       Provide us with the duly completed and signed invoicing payment details.

Step 2

Our Compliance officers consider and accept the application.

Step 3

The client is informed of decision of compliance department and invoice is issued to client.

Step 4

The client settles our invoice.

Step 5

Application is submitted to the authorities.

CUSTOMER DUE DILIGENCE REQUIREMENTS

CDD documents, in original or as certified true copies, are required on each shareholder, director and beneficial owner of the company:

 The CDD documents required to be submitted are as follows:

(i)      Individual

(a)     CV details

(b)     Valid passport copy

(c)     Bank Reference from a recognized banking institution which has known the person for at least the last two years.

(d)     Proof of residential address

(ii)    Corporate Body

(a)     Certificate of Incorporation/Certificate of Good Standing

(b)     List of controlling shareholders and directors

(c)     Latest audited financial statements or Corporate Profile - in case latest audited accounts are not available

(d)     Confirmation from the Management Company to the effect that it holds on records CDD documents on the controlling shareholders of the corporate body and that these will be made available to the Commission upon request

(iii)  Limited Partnership

(a)     Certificate of Registration/Establishment/Good Standing of the Limited partnership and its General and limited Partner

(b)     Latest audited financial statements of the Limited Partnership and its General Partner or Corporate profile – in case latest audited accounts are not available

(iv)   Fund

(a)     Certified true copy of Certificate of Incorporation

(b)     Certified true copy of Private Placement Memorandum

(c)     List of directors

(d)     Latest audited financial statements or Corporate Profile - in case latest audited accounts are not available

(e)     Resolution approving setting up of Mauritius subsidiary

(f)      List of major investors

FEES AND CHARGES

Professional Fees

Our fees are the most competitive available on the market.  Our fees are quoted on request and generally consist of:

		USD Set up		USD Annual
One-off
Professional fees on set up		1,500		-
Recurrent
Secretarial & provision of registered office per annum		1,100		1,100
Provision of directors per annum  (USD 750 per director)		1,500		1,500
Provision of nominee shareholders per annum (optional)
Administration fee per annum				See note 1
Accounting fees per annum				See note 2
Application for TRC		500		500
Disbursement/compliance fee		100		100

Note1: Administration fees are billed quarterly or half yearly (depending on level of activity) on a time spent basis at the average rate of USD 100 per hour.

Note 2: Accounting fees are billed annually (depending on level of activity) on a time spent basis at the average rate of USD 100 per hour.

Fees Payable to the Registrar

	USD Set up	USD Annual
On incorporation (one off)	75
Annual Fees starting next calendar year after incorporation	300	300

Fees Payable to the Financial Services Commission

	USD Set up	USD Annual
Processing fees (one off)	500	-
Annual Fees March 2012 to June 2012	875
Annual Fees July 2012 to 30 June 2013	1,750	1,750

OUR SERVICES

Strategic Legal Solutions Group Limited works closely with its Mauritian partners to provide a full range of trust, corporate and fund services.  These partners are part of the CIEL GROUP which is one of the largest conglomerates in Mauritius.  The work we typically carry out for High Net worth Private clients, Private Equity Funds, Multinationals and their advisors in major onshore jurisdictions such as USA, UK etc. relate mainly to the use of Mauritius’ excellent network of Double Taxation Treaties with India, China, and Singapore etc. We present an efficient and cost effective “one stop shop” in Mauritius for International Tax and Global Estate Planning, Trust and Fiduciary Services, Fund Administration and last but not least, the provision of Back Office Accounting & Administration Facilities.

Our services with respect to administration of global business companies include but, are not limited to, the following:

Set Up Stage

1.       Liaising with FSC for the approval;

2.       Provision of resident directors;

3.       Drafting service Agreement whereby MITCO will act as Registrar, Secretary and Administrator including responsibilities to prepare annual accounts;

4.       Drafting of constitution;

5.       Submission of application forms for incorporation and for global business licence;

6.       Arranging and attending the launch Board meeting;

7.       Application for Tax Residence certificate; and

8.       Arranging for opening of bank accounts in Mauritius and abroad, providing local signatories effecting payment of expenses and following up on transfers.

On-going Services

1.       Registered Office, Secretarial, and Registrar Services

1. Provision of registered office facilities; 
2. General administration of the Company including receiving and dealing with applications, notices and correspondence on behalf of the Company; 
3. Ensuring that statutory registers are properly maintained; 
4. Keeping statutory books and maintaining records; 
5. Conducting/reviewing due diligence on investors/shareholders as per the Financial Intelligence and Anti-Money Laundering Act 2002 and the Code on the Prevention of Money Laundering and Terrorist Financing; 
6. Ensuring that audited financial statements are filed with the FSC;
7. Ensuring that the provisions of the constitution are complied with;
8. Convening Board and shareholder meeting and taking minutes thereof; 
9. Guiding the Board as to its duties, responsibilities and powers; 
10. Keeping the Board updated of changes in regulatory requirements; and 
11. Attending to any other queries that may arise in the day to day administration of the Company.

2.       Accounting and Administration Services

1. Preparation and keeping of all accounting records; 
2. Application for the renewal of the licence and tax residence certificate; 
3. Filing of annual financial statements with the FSC; 
4. Filing of Income tax returns with the Director General of the Mauritius Revenue Authority; and 
5. Advising on local regulatory, legal and tax changes impacting the Company.

3.       Treasury Services (where applicable)

1. Providing local signatories; 
2. Coordinating bank transfers for investments/disinvestment; and
3. Monitoring local bank accounts and defraying local expenses, as appropriate under delegated authority of the Board.

 CONCLUSION

We hope that the above will suffice your concerns regarding registration of Global Business Company 1 in Mauritius.

Please feel free to contact us at ceo@stralexgroup.co.ke or okelloted@sichangi.com for further any further information or clarification

Yours faithfully,

FOR: STRATEGIC LEGAL SOLUTIONS GROUP LIMITED

Corporate Law & Business Services Consulting Group – a participating consultancy in the SLS Group of consultancies.