On 18 January 2018, the Parliament of Mongolia approved several amendments to the Banking Law (the “Amendments”) which became effective from 1 April 2018.
The Amendments were enacted to meet the objectives of (i) increasing the requirements applicable to founders, shareholders, Board of Directors, independent Directors and Executive Directors, (ii) improving the efficiency of enforcement measures, and (iii) increasing the transparency and stability of banks. The following is a non-exhaustive list of some of the main changes effected by the Amendments.
Prohibition of Subsidiaries and Other Restrictions
Pursuant to the Amendments, banks are no longer permitted to establish subsidiaries or controlled companies for conducting financial activities i.e. where a different /parent/ company solely or jointly with affiliated parties owns 20-50% of the total issued common shares of a company in the case of a controlled company and where the same solely or jointly with affiliated parties owns 50% or more of the total issued common shares of a company in the case of a subsidiary company, as defined in the Company Law. Accordingly, if a bank wishes to engage in financial activities such as underwriting or custodian services, it must apply to the Financial Regulatory Commission itself to obtain the license to undertake the foregoing activities. However, we note that banks retain the right to purchase securities provided that the total amount purchased does not exceed 20% of the capital of the bank and is limited to 10% of the total amount of the shares issued by any one legal entity. Furthermore, banks are no longer permitted to engage in investment services on behalf of their clients on the basis of the instructions thereof. Banks are now also prohibited from providing loans to its shareholders during the first year of its operations.
Major Shareholder Requirements
The Amendments have widened the definition of a major shareholder and have introduced new criteria applicable to major shareholders. A major shareholder is now defined in the Banking Law as (i) a shareholder who solely or jointly with its related parties holds 5% or more of the shares of a bank, or (ii) a shareholder who has the ability to influence the policy, decision making or management of the bank.
The following criteria is applicable to major shareholders:
(a) the shareholder has not been subjected to insolvency proceedings or if the shareholder is an individual, he/she is not an authorised official of a legal entity that has been subjected to insolvency proceedings;
(b) the shareholder has not been convicted of crimes against the economy, rights of ownership, public safety and interest, corruption or security and wellbeing of the nation or humanity;
(c) the shareholder has sufficient financial capacity and will not give rise to conditions which may affect the operations of the bank adversely;
(d) if the shareholder is a legal entity, then the relevant banking group is of a structure which will allow for inspections to be carried out by the BoM; and
(e) the shareholder must be able to provide sufficient evidence of its ultimate beneficiary.
Related Parties and Banking Group
The definition of a “related party” has been clarified and expanded and is now defined in the Banking Law as the following:
(a) a member of the banking group;
(b) an individual, legal entity, its authorised official, or the spouse, parent, sibling or child thereof who owns 5% or more of the shares of a bank or any member of a banking group;
(c) a legal entity in which 5% or more of the shares thereof are owned by a bank;
(d) a legal entity in which 5% or more of the shares thereof are owned by an authorised official of a bank or the spouse, parent, sibling or child thereof;
(e) the authorised official of a bank or a member of a banking group or the spouse, parent, sibling or child thereof;
(f) an affiliated entity with an apparent influence on the operations of a bank;
(g) a legal entity where the role of an authorised official is executed concurrently by one individual who is an authorised official of a bank;
(h) a legal entity whose authorised official owns 10% or more of the shares with voting rights of a bank;
(i) any other individual or legal entity that is an affiliated party of any of the foregoing; or
(j) any other entity the BoM views as a related party.
The Amendments have added emphasis to the concept of a “Banking Group”, which is defined under Article 3.1.6 of the Banking Law as where a legal entity is a related party of another legal entity and either one of the legal entities is a bank. Whilst the terminology and definition of the Banking Group existed prior to the enactment of the Amendments, it was not often used in provisions of the Banking Law. The Amendments also introduced the concept of the “Parent Company of the Banking group” which is defined in Article 3.1.14 of the Banking Law as the company which directs and manages the Banking Group and its members. Now that the definition of ‘related party’ has also been revised, it is possible that the concept of a Banking Group and its participants could end up being relatively wide in scope.
The definition for the ultimate beneficiary was introduced by the Amendments and is defined as an entity which (i) directs the operations of the bank or delegates this authority to another entity, or (ii) owns the shares of the bank through a legal entity in one or more continuous links, or has established the given legal entity and in other words is the ultimate beneficiary of the shares and activities of the bank. In relation to this, banks are now also required to deliver information on its ultimate beneficiaries to the BoM and to renew and deliver such information for each instance of a change in its ultimate beneficiary.
Under the Amendments, an extensive range of enforcement measures were introduced, which include the following:
Stabilization Plan: Under Article 47 of the Banking Law, a bank will be required to conduct a pre-assessment of risks depending on their activities and the relevant economic state, and to develop a stabilization plan containing measures to retain its financial and liquidity capacities, which shall be approved by its Board and delivered to the BoM. Moreover, the stabilization plan must meet the requirements of the Banking Law and the BoM will have the right to demand changes to be made to the plan. Where changes have not been duly effected or the BoM deems that the plan is not able to be implemented, the BoM has the right to impose further requirements on the bank which include the following:
(a) to reduce the general risk levels of the bank;
(b) refinance the bank through the issuance of shares or securities convertible into shares, take immediate action to improve the lending capacity and liquidity of the bank;
(c) amend the business or strategy plan of the bank, strengthen the core operations of the bank;
(d) change the management or organisational structure of the bank;
(e) other requirements the BoM deems necessary.
Preventative Measures: Under Article 48 of the Banking Law, the BoM has the right to take the below preventative measures if (i) the bank breaches the Banking Law, regulations, procedures and decisions of the BoM, or (ii) the bank is likely to do so, or (iii) the bank does not satisfy the requirements of banking licenses, or (iv) the bank engages in unreliable or ‘irregular’ or ‘abnormal’ activities:
(a) require or issue a warning to the bank to rectify the breach or deficiency;
(b) impose an order to rectify the breach or deficiency within a set period of time;
(c) order the implementation of the stabilization plan in order to ensure that the liquidity of the bank meets the relevant requirements;
(d) order the increase of the bank capital within a set period of time;
(e) order the implementation of measures to improve the management, organization, operations, risk management and internal monitoring of the bank;
(f) if the BoM deems that the compensation system for the management of the bank will adversely affect the capital adequacy of the bank, restrict the salary and compensation of the members of the management;
(g) require that consent is sought from the BoM prior to engaging in certain activities or concluding certain transactions;
(h) require that the average of the total assets of the bank for the given quarter does not exceed the average of the total assets for the preceding quarter or to require the bank to diversify its assets;
(i) prohibit the purchase of property or the establishment of bank branches;
(j) fully or partially restrict or suspend the operations of the bank;
(k) demand the sale of property or the liquidation of its branches;
(l) suspend or dismiss the executive management of the bank;
(m) suspend, terminate the rights of or dismiss the members of the Board of Directors of the bank;
(n) if any of the above is not complied with by the bank, suspend the voting rights of the major shareholders of the bank;
(o) implement the conditional management of the bank;
(p) any other measures the BoM deems necessary.
Conditional Management: Under Article 49 of the Banking Law, if the BoM deems that (i) the implementation of preventative measures is not sufficient in improving the operation of the bank or in reviving the reliable and stable management of the bank, or (ii) if through inspections, it is deemed that the financial capacity of the bank is deteriorating, the BoM may decide to appoint an Authorised Representative to implement the conditional management of the bank for up to 1 year. During the implementation of the conditional management of the bank, the BoM may temporarily transfer the rights and duties of the executive management of the bank to the Authorised Representative or take measures to review, validate and improve the accounting and financial statements of the bank. Under Article 52.2 of the Banking Law, the Authorised Representative has the following rights:
(a) issue decisions independently in relation to the operations of the bank;
(b) if the Authorised Representative deems it necessary, to fully or partially suspend any obligations in relation to any financing obtained from others for the duration of the period of conditional management;
(c) if the Authorised Representative deems that prior loan, deposit agreements and other agreements concluded with customers were concluded on different terms than those applicable at the time and it has affected the interests of the bank adversely, then to amend, void or terminate such agreements;
(d) enter into agreements on behalf of the bank;
(e) file claims on behalf of the bank;
(f) terminate or amend employment agreements concluded by the bank with its employees, temporarily employ requisite employees; and
(g) change the structure and amount of the capital of the bank in order to satsify capital adequacy requirements.
Restructuring: Under Article 53 of the Banking Law, the BoM may also take measures to restructure the bank if (i) the bank has a loss of financial capacity or conditions have arisen which will inevitably lead to the bank losing financial capacity, or (ii) inspections carried out by the BoM determine that the bank is no longer able to conduct normal activities, or (iii) if the restructuring of the bank is necessary to protect the interests of the public. Bank restructuring can take the following forms:
(a) transfer of the assets and liabilities of the bank;
(b) establishment of a special purpose bank;
(c) changes to the structure and amount of the share capital;
(d) conversion of debts into shares.
The changes to the structure and amount of the share capital specified above can be carried out in order to reduce the losses or debt of the bank and to increase its capital by the following measures:
(a) conversion of securities convertible into shares;
(b) changes to the structure and amount of the share capital;
(c) stock split or merge;
(d) any other actions to reduce the losses and debts of the bank or to increase the capital of the bank.
The restructuring process will be carried out by the Special Representative appointed by the BoM (different from the Authorised Representative carrying out the conditional management above) in accordance with the decisions of the BoM. In addition, Article 56.5 of the Banking Law provides that upon the appointment of the Special Representative, the rights and authority of the management, authorised officials as well the rights to dispose the property of the bank will be fully transferred to the Special Representative. The Special Representative has the authority to reduce the price of the securities to be converted in which case such reduction will be final and the holder of the securities shall have no right to object to the reduction. The Special Representative also has the right to convert certain debts into shares and the conditions and requirements for the conversion of debts are to be determined by a regulation to be approved by the BoM.
It should be noted that the above restructuring measures do not require the consent of the shareholders or creditors under the Banking Law.
The Amendments introduce the concept of the creation of a‘Stabilization Fund’ by the BoM which will be used for the purposes of improving or stabilizing the financial situation of banks and for the implementation of bank restructuring.
Criteria for Executive Management
The Amendments have introduced increased criteria applicable to the Executive Management of a bank. In particular, the Executive Management must not have any type of criminal record and must have a degree in banking, finance or economics and at least 10 years of specialised work experience, including 5 years of work experience as an authorised official of a banking, finance institution. If they are an authorised official of another professional institution in the financial market, they must not have conflicts of interest and must not affect the decision making of the bank adversely. The executive management is also expressly prohibited from being an authorised official of another bank, member of its banking group, or an affiliated legal entity of the bank engaged in non-financial activities and must not have been an authorised official of the BoM in the last 2 years. Moreover, the Executive Management of the bank cannot be a member of the Audit, Salary and Promotion or Nomination Committees of the Board of Directors and shall not have voting rights in relation to decisions on choosing, appointing, dismissing, determining the rights of or monitoring the Executive Director.
Criteria for Board of Directors
The criteria applicable to the Directors of the Board were also increased. As was the case with the Executive Management, the candidate for Director must not have any type of criminal record and must have received higher education, be specialised in banking, finance, economics, law, information technology or company governance and must have at least 10 years of specialised work experience, including 5 years of experience as an authorised official of a banking, finance institution. If they are an authorised official of another professional institution in the financial market, they must not have conflicts of interest and must not affect the decision making of the bank adversely. The BoM will determine and notify the bank on whether the candidate for the Director satisfies the criteria on the basis of the information which is to be delivered to the BoM by the bank prior to the appointment.
Banks are also required to have at least 1 independent Director, who must now not have any type of criminal record, not have conflicts of interest and must not affect the decision making of the bank adversely if they are an authorised official of another professional institution in the financial market. They must also have a degree in banking, finance, economics or law and have at least 10 years of specialised work experience, including at least 5 years of work experience as an authorised official of a banking, finance institution. They cannot be a major shareholder of the bank, or a member of its banking group and must not be a related party of a major shareholder of the bank, or a member of its banking group or a related party of an individual employed as an authorised official at the relevant bank or a member of its banking group in the last 5 years or as a general employee in the last 3 years. Moreover, the independent Director must be a member of the Audit and Risk Committees of the Board of Directors and must participate and vote in the activities of the foregoing committees and approval of conflict of interest of interest transactions.
The BoM shall issue a decision for the involuntary liquidation of a bank and appoint a receiver if (i) the bank establishment license of a bank has been revoked in connection with the above enforcement measures, or (ii) the BoM issues a decision determining that the above restructuring measures is unable to be implemented on the bank. Pursuant to the Amendments, a more detailed process of liquidation was introduced and the authority of the receiver was expanded to include general rights of disposition of the property of the bank, as well as the representation and management of the bank.
Amendments Compliance Law
In connection with the Amendments, a Law on Compliance with the Amendments to the Banking Law was also enacted by Parliament on 18 January 2018 (“Amendments Compliance Law”) which became effective from 1 April 2018. The Amendments Compliance Law provides for the following:
(a) any capital contributions or shareholding rights of banks in their subsidiaries or controlled companies shall terminate from 1 January 2019;
(b) banks, bank founders, shareholders, Board of Directors, members of the Board of Directors, executive management of the bank and any other entity referred to in the amendments to the Banking Law shall comply with said amendments within 31 December 2018 and shall deliver to the BoM a report on such compliance along with supporting documents; and
(c) provisions relating to the creation of the bank stabilization fund referred to in the amendments to the Banking Law shall be complied with from 1 January 2019.
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 Except for asset-backed securities or in relation to securities issued by the Government, the BoM or a legal entity engaged in loan database activities.
 Article 361 of the Banking Law
 Article 3.1.2 of the Banking Law
 According to Article 84.1 of the Company Law, an authorised official of a company refers to members of the Board of Directors, executive management, head of the finance department (CFO), general accountant, other senior executives, secretary of the board, and other entities that are directly or indirectly involved in the official decision making of a company or the execution of agreements and transactions.