Classification of banks for purposes of entering the window of sale of foreign currency

Number of views 490 Date 11/06/2017 - 19:47

Ali Mohsen Alalak

Since the beginning of this year, the Central Bank of Iraq has started to adopt specific benchmarks regarding the participation of banks in the window of sale of foreign currency (dollar). This comes after nearly a year of preparation and consultation to set these standards in their current form. Of the bank, which in turn determines its share of the quantity sold from foreign currency per day.

According to the new system, the central bank has put the sale of the dollar in a framework that responds to legal and regulatory requirements and local and international, and adopts the principles of disclosure, transparency and reliability, raising the financial system to the level of international practices.

What are the reasons for this classification and what are the criteria adopted and the mechanisms for determining it?

This classification has been adopted in order to achieve a set of legal and economic objectives in the forefront of which are:

1. Requirements of the international financial system

The high risk of money laundering and the financing of terrorism has led to the interest of international organizations in establishing domestic and international rules and procedures to face the risks of these operations in order to protect the financial system and society. The adherence of these rules and procedures by countries and institutions is a fundamental principle in international financial relations and channels, The banks and others have become dependent on their degree of compliance and application of international rules and conventions in this regard, and this has led to the exclusion of entities, and even countries, and placed in the block because of the weakness of regimes Procedures, and environment, according to Derisking. International financial institutions cut access to the international financial system to local firms and banks because of increased risk of financial crime.

On the other hand, as Iraq deals mainly with the dollar currency (since the dinar is pegged to the dollar), and the country's foreign transactions are carried out, it makes Iraq subject to the procedures and rules of circulation and transfer of the US dollar set by the Federal Reserve and the US Treasury, which aims to monitor and investigate (Including Iraq) to design the rules, procedures and regulations necessary to monitor the movement of the dollar and identify the routes of its use and transfer from one place to another.

The actions taken by the Central Bank in the application of AML / CFT rules and principles resulted in the removal of Iraq from the gray zone within the classification and evaluation of the International Financial Action Organization (FATF), which was internationally concerned. Iraq was threatened with an international embargo, International financial crisis in Iraq.

The obligation of banks to apply compliance rules and the establishment of regulations, programs and instructions by the central bank, as well as the process of linking the sale of the dollar to compliance with it, with effective monitoring of all this, gave international organizations positive messages, which resulted in the reclassification of Iraq and the removal of the risk of financial embargo.

2. Requirements for the application of AML / CFT law.

The Anti-Money Laundering and Terrorism Financing (AML / CFT) Law has imposed obligations on financial institutions to take care of customers, starting with identifying the client and the real beneficiary, procedures for opening accounts, documents, remittances, etc., and establishing precise policies, procedures and controls that comply with obligations imposed in the area of ​​control.

The law also mandated the Central Bank as the supervisory and supervisory authority over financial institutions, as well as its functions to develop inspection procedures and the means and standards for following up the compliance of financial institutions with AML / CFT regulations.

Since the sale and purchase of the dollar is conducted primarily in financial institutions (banks) and involves significant volume operations, it requires monitoring compliance with the rules of compliance at the banks in accordance with the rules of control in accordance with the law in terms of verification of sources of funds (dinar) The principle of Know Your Customer, and in terms of verifying the final and intermediate uses, in order to check the safety and nature of such transactions. The law has instructed the Governor of the Central Bank to establish the necessary instructions for due diligence by financial institutions. Naturally, The regulations set a benchmark mainly for narrowing and expanding the entry of banks into the sale and purchase of foreign currency.

The essence of the classification is based on the extent to which banks comply with AML / CFT rules, under the (compliance) standard, which includes a set of criteria that relate to banks' procedures on all aspects.

3 - Requirements to improve the performance of banks

The standards that have been set up represent an important incentive to improve the performance of banks, as they drive the reorganization of banking in the framework of regulatory, regulatory and legal risk-free and upgrade the level of employees. The Central Bank committed banks to develop units or departments that can contribute to this, Anti-money laundering and terrorist financing, compliance management, risk management, strengthening of internal control departments, and the application of corporate governance principles that are based on strengthening oversight, disclosure and transparency.

Since the introduction of the entry criteria into the currency sale window, banks have witnessed a wide range of procedures, such as the creation of units, the appointment of specialists and expertise, the appointment of international accountants, and the provision of indicators of the safety of their operations so that they can deal with the outside world and open their channels Financial institutions with international financial institutions, which have become highly sensitive to the indicators contained in the established standards.

4. Requirements for stability of exchange rates

The criteria used to support the stability of the local currency exchange rate, which is the most important objective of monetary policy, help to put the sale and purchase of the dollar on sound bases and rules to reduce the phenomena of manipulation and speculation and the abolition of intermediaries (who have taken the largest margin of the exchange rate difference) The role of intermediaries has declined significantly because banks are obliged to follow the rules and regulations that are reflected in the standards and then the bank's share in entering the window.

In order to achieve the said objectives, seven criteria were adopted for classifying banks entering the foreign currency sale window. What are these criteria and what is their identification mechanism?

It should be noted that this classification is not a classification of the performance of banks in general (which is mentioned in the daily sales bulletin), but rather reflects the extent to which the Bank complies with the rules relating to the sale and purchase of foreign currency. The evaluation of the general banks in terms of their overall performance and performance is carried out in accordance with other international standards, notably the international standard (CAMELS), which is an early warning whereby banks are classified as capital adequacy C, asset quality A, management M, profitability E, Market Risk Sensitivity, each of which is expressed in a number of financial indicators. This assessment was carried out by the Central Bank in 2013 by an international audit office, and since several years have passed, We will finish it soon, as it will be clarified Performance of the banking sector and the efficiency and performance of banks, and will be part of the current criteria used in the classification of banks for entry into the window.

As for the classification of banks to enter the foreign currency sale window, it is mainly based on the banks' compliance with AML / CFT rules, the Central Bank's due diligence instructions as well as the legitimate uses of currency and remittances abroad. Criteria and mechanisms that can be clarified through the following points:

First: Criteria for classification of banks

The classification is based on seven basic criteria, from which one sub-branch is given, each of which gives a relative weight that contributes to determining the final grade of the bank:

Compliance (degree of compliance with AML / CFT rules and procedures) with the greatest weight.
Compliance with the foreign exchange window instructions.
Standard of dealing with correspondent banks in terms of being internationally accredited and classified.
Match the bank statements with correspondent bank statements.
Meeting the customers' requests, including the number of bank branches.
Litigation against the bank.
The contract with an international auditing company, taking into account the date of establishment of the bank, as the download of five degrees of degrees of banks, which has not been established for more than a year.
Second: Review and change the classification

The banks 'ratings are constantly changing according to the banks' compliance with the requirements and procedures according to the Central Bank's audits and inspections, or by providing the bank with proof of improvement in compliance with one or more criteria. The bank conducts periodic review of all banks. The evaluation process is by type of criterion and the competence of the department or formation, which provides high credibility and objectivity.

Third: Transparency of classification

The Central Bank shall provide each bank with the degrees granted according to each criterion and according to each element of each criterion. The bank shall be given the opportunity to object or make observations. A senior committee headed by the Deputy Governor and a senior staff member shall review the notes or objections and meet the concerned parties. The degree of evaluation as provided by the bank, which is always open to the bank and at any time feel that it has made progress in the application of the said rules.

Finally, it must be said that the basis of the issue is to achieve effective control and precautionary measures required by Iraqi law, and are bound by our obligations under international conventions and membership of the international organizations concerned. Compliance with these standards avoids the risk of financial crimes and the closure of the financial institutions' access to terrorist financing operations. Also to improve Iraqi banking and enable it to build bridges and channels with accredited international financial institutions.

Here, we say to some of those who may be affected by these measures: the damage to them will be greater in the event of non-compliance, as they expose them to non-compliance with the said standards to serious consequences for their work, such as reputation risks, and legal and judicial risks, and close to external outlets.

The Central Bank, as it elevates its work to the level of best international practices, looks forward to support and support from the concerned parties to enable it to fulfill its role and tasks, and assures everyone that it is ready to accept any remark or criticism, in order to be constructive and objective criticism carried out in accordance with its institutional channels in order to preserve the reputation of this institution. And its role in the development of the financial system, especially in light of the financial crisis we are going through and the challenges they have produced in order to maintain economic stability in Iraq through the achievement of financial and monetary stability.

Governor of the Central Bank of Iraq

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