It is with pleasure that we send you the first of our quarterly Corporate Legal Updaters for 2017. Our aim is to update you on recent UAE legal and regulatory changes which may be of significance to your business. In this updater, we comment on how the UAE is strengthening its laws and regulations regarding bribery and corruption. We describe how the UAE is developing its regulatory framework in the financial services sector and enhancing corporate governance of LLCs. We also draw your attention to the Dubai International Financial Centre’s (DIFC) new Intermediate SPV regime, a cost effective tool to facilitate the structuring of transactions for existing DIFC registered entities. We trust that you find the updater interesting and useful and would welcome any comments and/or requests for future topics.
Promotion of Financial Products onshore in the UAE
In January 2017, the UAE Securities and Commodities Authority (SCA) issued SCA Board of Directors Decision No. 3 RM of 2017 on the Regulation of Promotions and Introductions (Regulations), which came into force in February 2017.
While some of the provisions of the Regulations require further clarification from the SCA, the issue of the Regulations is a significant step in the development of the UAE onshore regulatory regime, as it fills a legislative gap, and provides greater certainty for the UAE financial services industry and foreign stakeholders.
The Regulations principally cover:
- the promotion of financial products onshore in the UAE (this covers the marketing, distribution, advertising, publishing or providing any information/marketing material in relation to “financial products”. This term includes shares, bonds sukuks, investment fund units, commodity contracts, derivatives and any other securities or financial instruments issued by a foreign issuer); and
- the introduction of a person who wishes to receive a “financial service” (including trading services) to either an SCA-licensed entity or any other entity which is regulated by a foreign regulator similar to the SCA.
The Regulations prohibit:
- the promotion of financial products unless the promoter is licensed by the SCA or one of eight specific exemptions available under the Regulations applies; and
- any person from introducing a person located onshore in the UAE to either an SCA-licensed entity or an entity licensed by a foreign regulator similar to the SCA, unless the introduction is approved by the SCA or one of the exemptions under the Regulations applies.
Where no exemption applies, an SCA-licensed promoter marketing a financial product will either need to give notice to the SCA or make an application to the SCA for approval, depending on the type of financial product being promoted.
In addition, the Regulations contain further specific provisions on the marketing of foreign funds onshore in the UAE, which aim to fill the legislative vacuum following the issue of SCA Board of Directors Decision No. 9 of 2016 on the Regulation of Investment Funds (Fund Regulations). The Regulations should therefore be read in conjunction with the Funds Regulations when considering the promotion of foreign funds onshore in the UAE. The Regulations impose additional requirements on a SCA-licensed promoter in respect of the marketing of foreign funds onshore in the UAE, which relate to both public offers and private placements of foreign funds.
The Regulations also confer on SCA the ability to impose a broad range of sanctions. These include warnings, fines, suspension and cancellation of a promoter’s licence or an introducer’s approval. Under the Regulations, the SCA also has the right to publish the names of persons that have breached any of the provisions of the Regulations.
Although these much-awaited regulations provide greater certainty for the UAE financial services sector and foreign stakeholders, as a result, previously assumed safe harbours can no longer be relied on.
The Dubai International Financial Centre (DIFC) has recently introduced a new regime allowing “Qualifying Applicants” to set up “Intermediate SPVs” in the DIFC.
This is the first time, outside the DIFC’s Special Purpose Company regime, that is has been possible to establish a non-regulated special purpose vehicle in the DIFC without it having a substantive presence in the DIFC.
To establish an Intermediate SPV (ISPV), a Qualifying Applicant must be either:
- a holding/proprietary investment company or single family office already registered in the DIFC; or
- a collective investment scheme established in the DIFC; or
- a collective investment scheme established outside the DIFC but managed by a fund manager or asset manager that is regulated by the Dubai Financial Services Authority.
In practice, therefore, ISPVs are likely to be used by DIFC funds, DIFC fund managers, DIFC holding companies, and DIFC family offices for the purposes of structuring and ringfencing downstream investments in operating companies. The new regime reflects the DIFC’s belief that its substantive presence approach does not serve any real purpose with respect of ISPVs, as the primary entity involved already has a substantive and/or regulated presence in the DIFC.
The key benefits to setting up an ISPV (as opposed to a holding company with a substantive presence in the DIFC) are as follows:
- the ISPV may use the premises leased by the Qualifying Applicant as its registered office, thereby removing a significant overhead expense;
- there is a simplified and expedited establishment process, including a simplified business plan;
- lower registration fees (US$1,000 as opposed to US$8,000); and
- lower annual fees (US$3,000 as opposed to US$12,000).
Each Qualifying Applicant will need to provide sufficient assurances to the DIFC Registrar of Companies that the ISPV will only be used for purposes that: (a) fit into the overall objectives of the DIFC; and (b) if applicable, are in line with the Qualifying Applicant’s regulatory status (including AML requirements) and the UAE’s obligations under the OECD’s Common Reporting Standards. An ISPV may not be used as an ultimate holding company within a group structure, and nor may it be used as an operating company.
Although the DIFC Companies Law and Regulations have not yet been amended to reflect the new ISPV regime, the above has been implemented on an interim basis since 19 September 2016 (having received the requisite DIFC waivers and amendments to the DIFC Companies Regulations and DIFCA Operating Regulations). Amendments are expected to be made to the DIFC Companies Law and Regulations later this year to formalise the regulation of ISPVs.
The UAE strengthens it is Penal Code to counter bribery and corruption
Changes to the UAE Penal Code at the end of 2016 have extended the ambit of laws relating to bribery and corruption in the UAE.
The extension of the Code also reflects the trend in the region of the increasing importance of local legislation and regulation in addition to international legislation such as the Foreign Corrupt Practices Act and UK Bribery Act.
For more than a decade the Penal Code in the UAE has contained prohibitions against bribery and corruption, making it an offence to bribe a public official. The act of offering or promising a bribe was also prohibited, as was the acceptance of a bribe by a public official. Under the new Penal Code, there are now provisions that include:
- bribery involving a foreign public official or an official of an international organisation (under the old Penal Code a public official was limited to a government employee);
- the criminalisation of offering a bribe in the private sector, not just accepting one; and
- tougher penalties for bribery and corruption.
In particular, the prohibition of bribing a foreign public official brings local law in the UAE more in line with other jurisdictions such as the US and the UK.
Under the new Penal Code a “foreign public official” is described as anyone who occupies a legislative, executive, administrative or judicial position in another country, whether permanent or temporary, and whether he is elected or appointed, with or without a salary, and any person entrusted with public service functions.
There are various punishments for committing an offence under bribery and corruption provisions in the UAE law including fines and imprisonment for any public officials, which is now extended to foreign public officials and officials of international organisations.
Prior to these amendments the offering of a bribe in the private sector was also not a criminal offence under the Penal Code. The new Penal Code now criminalises the acceptance as well as the offer of a bribe whether in the private sector or not.
New data protection offences and higher corporate fines introduced by UAE Penal Code updates
The United Arab Emirates Penal Code was amended with effect from 29 October 2016 to outlaw the unauthorised destruction or disclosure of data by “public servants” and the copying, distribution or disclosure of information that any person obtains in the course of their employment. These new offences will particularly target workers in the public and private sectors (including contractors and service providers) that are mishandling or otherwise unlawfully dealing in personal data. Other changes to the Penal Code also increase the maximum penalty payable by organisations for criminal acts committed by their representatives.
New data protection offences
An amendment to the Penal Code (Federal Decree-Law No.7 of 2016) introduced two new articles with particular relevance to privacy and data protection:
- Article 247(bis) was added to state:
“Any public servant or a person entrusted with a public service in other than [Article 247], who unlawfully gives, destroys, hides away or facilitates to another, data or information that came to his knowledge or that he has extracted by reason of his office shall be sentenced to temporary imprisonment.”
Article 247 refers to employees of postal, telegraph or telephone authorities who unlawfully intercept messages. This new provision substantially widens the scope for criminal liability of public sector workers that misuse or mishandle data. The definition of a “public servant” under Article 5 of the Penal Code could also capture private sector contractors or outsourced workers as “persons assigned to a certain task by a public authority”. The term of any temporary imprisonment under the Penal Code is a minimum of three years and a maximum of fifteen years.
- Article 380(bis) was added to state:
“Any person who unlawfully reproduces, distributes or provides others with the contents of a telephone call, message, information, data or other issues which came to his knowledge by virtue of his work shall be punished by a jail sentence.”
Under UAE law existing before this amendment, criminal offences existed for the unauthorised disclosure or publication of information about a person’s private or family life or “secrets” obtained in the course of a profession. Article 380(bis) will enable more direct action to be taken against such offenders in the UAE. It is also worth noting that this provision is drafted widely enough to capture even single instances of data sharing or disclosure of recorded messages. The default period for a jail sentence under the Penal Code is a minimum of one month and a maximum of three years’ detention.
Another significant change to the Penal Code introduced by the same Decree will see companies facing higher penalties for offences committed by their employees.
Article 65, as amended, states that “juristic persons” (excluding government entities, official departments, public authorities and institutions) will be liable for crimes committed by representatives, directors or agents acting on their behalf or in their name. If the law prescribes a penalty other than a fine (for example, a jail sentence) then the organisation may be subject to a fine of up to AED 500,000 (approximately US$136,000). This is a ten-fold increase from the previous AED 50,000 maximum corporate fine.
Key points to note
The new offence under Article 247(bis) will be significant for public sector bodies and contractors, while Article 380(bis) will be relevant to all organisations operating or using service providers in the UAE (both from an internal policy perspective and in terms of enforcement options against rogue employees or service providers). In addition, companies should be mindful of the ten-fold increase in penalties for criminal offences committed by representatives when assessing risks associated with privacy and broader legal compliance.
Guidance on the Application of the UAE Companies Law to Limited Liability Companies
The new commercial companies law, UAE Federal Law No. 2 of 2015 Concerning Commercial Companies (the Companies Law) came into effect on 1 July 2015. The Companies Law represents a significant overhaul of the rules regulating private and public companies in the UAE. In the most part, it has sought to modernise outdated rules which were drafted to meet the needs of different era, and it has certainly addressed a number of pressing needs, for example, it expressly allows the pledging of shares. However, it has also introduced some controversial provisions; these include Article 104 which provides that the Companies Law provisions applicable to joint stock companies (JSCs) will also apply to limited liability companies (LLCs), save where the matter is otherwise regulated under the LLC section of the Companies Law.
This Article has caused significant market uncertainty and its meaning has ignited debate among lawyers, commentators and shareholders. This is largely because of the considerable differences between JSCs and LLCs. A number of the regulations applicable to JSCs are designed to protect public shareholders, and would be unnecessarily onerous for companies owned by a limited number of private shareholders, many of whom would be active in the management of the LLC.
In response to market debate and to provide much needed clarity, the UAE Ministry of Economy issued Ministerial Resolution No. 272 of 2016 concerning the Implementation of the Provisions of the Joint Stock Companies to Limited Liability Companies (Resolution), which came into force on 29 April 2016.
The Resolution clarifies that under the Companies Law, directors of LLCs will be held liable to the LLC and/or its shareholders and third parties for, among other things, the mismanagement of an LLC, in the same way that the directors of JSCs are.
The Resolution also clarifies that under the Companies Law (i) minority shareholders, auditors and the Department of Economic Development of the relevant Emirate each has the right to convene a general assembly; and (ii) there are procedures to be adopted when an LLC fails to appoint its directors and/or auditors.
The Resolution clarifies that the prohibition on financial assistance does not apply to LLCs. This exemption has resolved one of the most hotly debated issues since the Companies Law was issued. However, it is clear that the parameters of this exemption need to be further examined. The Resolution also clarifies that a number of JSC provisions relating to the formation, election, composition, number, nationality and remuneration of the board of directors do not apply to LLCs. This clarification helps maintain the flexibility of board formation which is one of the attractive features of an LLC.
The Resolution clarifies that additional regulations relating to LLCs’ day to day corporate governance do apply. In particular, in relation to their management, finance, accounting, auditing and general assembly. The shareholders, general managers and officers of LLCs should familiarise themselves with these additional regulations.
While the Resolution provides greater clarity on a number of issues, there still remains a level of ambiguity on the application of a number of provisions to LLCs. For example, the prohibition on granting loans to directors and their family members. The Resolution also includes a sweep-up provision which contemplates that JSC provisions will not apply to LLCs where a JSC provision is inconsistent with the nature of an LLC. Further guidance is needed from the UAE Ministry of Economy on the application of this provision.
Finally, there is general concern regarding the legal status of the Resolution and whether a ministerial resolution can take precedence over a federal law. However, irrespective of this legal debate, it is fair to say that the Resolution provides helpful guidance on how the competent authorities in the UAE will interpret certain provisions of the Companies Law.