mdec fintech developer bootcamp - fintech masterclass day 2

TEOH HUEI WEN4 October 2016 Associate, Corporate & Commercial Practice Group

Legal Issues: Fintech in Malaysia

Disclaimers

The information contained herein is not intended to constitute legal advice and is not to be acted on as such. You are advised to seek proper legal or other professional advice to progress your matter forward.

Agenda

• Regulatory Compliance• Anti-Money Laundering• Contract Law• Fundraising

Regulatory Compliance

• Who are the relevant Regulators?• Central Bank of Malaysia• Securities Commission• Communications and Multimedia Commission• Competition Commission• Personal Data Protection Commission• Ministry of Urban Wellbeing, Housing and Local

Government

• What are the relevant legislations?• Financial Services Act 2013• Money Business Services Act 2011• Moneylenders Act 1951• Communications and Multimedia Act 1998• Personal Data Protection Act 2010• Digital Signature Act 1997• Electronic Commerce Act 2006• Anti-Money Laundering, Anti-Terrorism

Financing and Proceeds of Unlawful Activities Act 2001

• Foreign Exchange Administration

• Personal Finance

• Financial Services Act 2013?

• Moneylending Act 1951?

• Securities Commission Guidelines on “P2P Platform”?

• Personal Finance• Financial Services Act 2013• “banking business” includes the business of

deposit taking, paying or collecting cheques and provision of finance licensed business

• “provision of finance” includes lending of money.

• Penalty: imprisonment for a term not exceeding 10 years or a fine not exceeding RM5 million

• Personal Finance• Moneylenders Act 1951• “moneylending” means the lending of

money at interest, with or without security, by a moneylender to a borrower.

• “interest” includes any amount by whatsoever name called in excess of the principal paid or payable to a moneylender in consideration of or otherwise in respect of a loan.

• Personal Finance• Moneylenders Act 1951• No person shall carry on or advertise or

announce himself or hold himself out in any way as carrying on the business of moneylending unless he is licensed under the MLA.

• Penalty: a fine between RM250,000 to RM1,000,000, or imprisonment for a term not exceeding 5 years or to both, and for subsequent offence, whipping may be imposed

• Personal Finance• Moneylenders Act 1951• Any person who assists an unlicensed

moneylender shall be guilty of an offence.

• Penalty: imprisonment for a term not exceeding 2 years or a fine not exceeding RM20,000 or to both.

• Personal Finance• Moneylenders Act 1951• Prescribed moneylending agreement

• Penalty: a fine between RM10,000 to RM50,000 or imprisonment for a term not exceeding 5 years or to both, and for subsequent offence whipping may be imposed.

• Void and have no effect and shall not be enforceable

• Personal Finance• Moneylenders Act 1951• Presumption as to the business of

moneylending – a single loan at interest made by a person shall raise a presumption that such person is carrying on the business of moneylending.

• Contract by unlicensed moneylender is unenforceable.

• Personal Finance• Moneylenders Act 1951• Prescribed interest rate• Interest for a secured loan: ≤ 12% p.a.• Interest for an unsecured loan: ≤ 18% p.a.

• Penalty: a fine not exceeding RM20,000 or imprisonment not exceeding 18 months or to both

• Agreement is void and have no effect and not enforceable.

• Personal Finance• P2P Lending• Only locally incorporated sole

proprietorships, partnerships, incorporated limited liability partnerships, private limited and unlisted public companies, will be allowed to be hosted on the P2P platform.

• Digital Bank• Financial Services Act 2013• “banking business” includes the business of

deposit taking, paying or collecting cheques and provision of finance licensed business

• Penalty: imprisonment for a tem not exceeding 10 years or a fine not exceeding RM5 million

• Restriction on the use of certain words• Financial Services Act 2013• No person shall use the following words in

its name, description or title without the prior written approval of Bank Negara Malaysia: bank, insurance, assurance, financial adviser

• Penalty: imprisonment for a term not exceeding 8 years or a fine not exceeding RM25 million.

• E-Money• Financial Services (Designated Payment

Instruments) Order 2013• Designated Payment Instruments include

electronic money, ie. an instrument that stores funds electronically in exchange of funds paid to the issuer, and is able to be used as a means of making payment to any person other than the issuer.

• E-Money• Financial Services Act 2013, Division 1 of

Schedule 1• Businesses which require the approval of

Bank Negara Malaysia include issuance of a designated payment instrument.

• Penalty: imprisonment for a term not exceeding 10 years or to a fine not exceeding RM50 million or to both.

• Payment System• Financial Services Act 2013, Division 1 of Schedule 1• Businesses which require the approval of Bank

Negara Malaysia include the operation of a payment system which:a) enables the transfer of funds from one banking

account to another, which includes any debit transfer, credit transfer or standing instructions but does not include the operation of a remittance system approved under the MSBA;

b) provides payment instrument network operation which enables payment to be made through the use of a payment instrument.

• Payment System• Financial Services Act 2013, Division 1 of Schedule 1• Penalty: imprisonment for a term not exceeding

10 years or to a fine not exceeding RM50 million or to both.

• Online Insurance• Financial Services Act 2013• “licensed business” includes insurance

business.

• Online Insurance• Bank Negara Malaysia Guidelines on Internet

Insurance • Internet insurance activities are defined as

the use of the Internet as a channel to transact insurance business with customers or as a platform for transmission of customers’ information.

• An insurer is required to seek Bank Negara’s prior approval to conduct Internet insurance.

• Foreign Currency Exchange• Money Services Business Act 2011• “money-changing business” means any or

all of the following:a) the business of entering into an

exchange transaction at a rate of exchange; or

b) the business of buying or selling travellers’ cheques, on behalf of an issuer of travellers’ cheques, at a rate of exchange.

• Remittance• Money Services Business Act 2011• “remittance business” means the business

of transferring funds or facilitating the transfer of funds, whether in any form or by any means or whether there is any movement of funds or not, on behalf of an originator person in or outside Malaysia, with a view to making the funds available to a beneficiary person in or outside Malaysia and the originator person and the beneficiary person may be the same person

• Foreign Currency Exchange/Remittance• Money Services Business Act 2011• No person shall carry on money services

business without a license issued under the MSBA.

• “money services business” includes money-changing business and remittance business.

• Foreign Currency Exchange/Remittance• Money Services Business Act 2011• No person shall issue or publish an

advertisement containing:a) an invitation or offer to enter into any

transaction relating to money services business; or

b) information which may lead, directly or indirectly, to a transaction relating to money services business.

• This prohibition does not apply to the advertisement for and on behalf of a licensed money-changer.

• Foreign Currency Exchange/Remittance• Money Services Business Act 2011• Penalty: a fine not exceeding RM5 million or

imprisonment for a term not exceeding 10 years, or to both.

• Foreign Currency Exchange/Remittance• Money Services Business Act 2011• Restriction on the use of the words “money

services business” in relation to the business, in the name or description or title of the person• money service business, money-changer, currency exchange,

money exchange, forex dealer, foreign exchange, bureau de change, remittance services, money transfer, money remit, funds transfer

• Penalty: a fine not exceeding RM5 million or imprisonment not exceeding 10 years or to both.

• Foreign Currency Exchange• Money Services Business Act 2011• Display the buying and selling rates under

the headings “we buy” and “we sell”.• Disclose the fees and charges for the

services rendered.• Issue a receipt in respect of the transaction.• Maintain anti-money laundering and anti-

terrorism financing compliance program.

• Remittance• Money Services Business Act 2011• Customers’ funds to be kept separately and

shall be deposited not later than the next business day of receipt of the funds.

• The remittance system shall first be approved by the Bank Negara Malaysia.

• Remittance• Money Services Business Act 2011• State the exchange rate, fees and charges

applicable, the amount in the currency that will be paid to the beneficiary, the fees and charges to be imposed by the correspondent agent, the estimated time for the transfer, the location where the funds are available.

• Issue a receipt in respect of the transaction.• Maintain anti-money laundering and anti-

terrorism financing compliance program.

• Remittance• Money Services Business Act 2011• B2B remittance transaction: the daily

outward transaction limit for a customer shall not exceed an aggregate amount of RM200,000.

• In other cases: the daily outward transaction limit for a customer shall not exceed an aggregate of RM50,000.

• Foreign Exchange Administration• A resident may only buy or sell foreign currency

notes with licensed onshore banks or licensed money changers.

• Approval is required for payment between residents in foreign currency, save for:• Settlement of any securities, financial instruments denominated in

foreign currency approved by the Bank Negara Malaysia;• Settlement of derivatives denominated in foreign currency;• Settlement of commodity murabahah transactions;• For education and employment overseas;• For any purpose by a resident individual to another resident

immediate family member (ie. spouse, parents, children and siblings).

• Foreign Exchange Administration• Resident entities are free to obtain borrowing up to RM1

million in aggregate from other than resident for use in Malaysia. The limit does not apply to borrowing from non-resident group of entities, non-resident direct shareholders, non-resident financial institutions.

• Resident individuals are free to obtain borrowing up to RM1 million in aggregate from other non-residents for use in Malaysia. The limit does not applicable to borrowing from non-resident immediate family members.

P2P lending / Personal Finance

• Robo-Advisor• Financial Services Act 2013• Business which require Bank Negara approval

includes financial advisory business.• “financial advisory business” means any of the

following:a) analysing the financial planning needs of a person relating

to an insurance product;b) recommending an appropriate insurance product to a

person;c) sourcing an insurance product from a licensed insurer for

a person; ord) Arranging of a contract in respect of an insurance for a

person.

• Fund Management / Investment Advice / Financial Planning• Capital Market and Services Act 2007• No person shall carry on a business in any regulated activity or

hold himself out as carrying on such business unless he is the holder of a Capital Market Services License or is a registered person.

• “regulated activity” includes fund management, investment advice, financial planning

• Penalty: a fine not exceeding RM10 million or imprisonment for a term not exceeding 10 years, or to both

• BNM Regulatory Sandbox• The grant of regulatory flexibilities for fintech

companies to experiment their solutions in a live environment.

• It applies to fintech companies intending to carry out any approved business under the FSA or money services business under the MSBA.

• BNM Regulatory Sandbox• Testing period not exceeding 12 months.• Cannot be used to circumvent existing laws and

regulations.• The product, service or solution is genuinely

innovative.

• Personal Data Protection Act 2010 (“PDPA”)• General Principle• Notice and Choice Principle• Disclosure Principle• Security Principle• Retention Principle• Data Integrity Principle• Access Principle

Anti-Money Laundering

• Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”)

• What is money-laundering?

• Relying on licensed banks’ AMLA compliance?

• Offence of Money Laundering:• engages, directly or indirectly, in a transaction that

involves proceeds of an unlawful activity or instrumentalities of an offence;

• acquires, receives, possesses, disguises, transfers, converts, exchanges, carries, disposes of or uses proceeds of an unlawful activity or instrumentalities of an offence;

• Offence of Money Laundering:• removes from or brings into Malaysia, proceeds of

an unlawful activity or instrumentalities of an offence; or

• conceals, disguises or impedes the establishment of the true nature, origin, location, movement, disposition, title of or rights with respect to, or ownership of, proceeds of an unlawful activity or instrumentalities of an offence.

• Offence of Money Laundering:• Penalty: imprisonment for a term not exceeding 15

years and a fine not less than 5 times the sum or value of the unlawful proceeds, or RM5 million, whichever is higher

• Offence of Money Laundering:• Inferences:• the person knows, has reason to believe or has

reasonable suspicion that the property is the proceeds of an unlawful activity or instrumentalities of an offence; or

• the person without reasonable excuse fails to take reasonable steps to ascertain whether or not the property is the proceeds of an unlawful activity or instrumentalities of an offence.

• Reporting Institutions includes:• Licensed banks;• Licensed insurers;• Approved issuer of designated payment

instrument;• Capital Markets and Services Licensees;• Licensees under the MSBA;• Moneylender under the MLA.

• Obligations of Reporting Institutions includes:

a) identify, assess and understand AML/CFT risks;b) implement risk control and mitigation measures;c) record-keeping;d) reporting – suspicious transaction reporting and

cash threshold reporting;e) KYC checks; andf) Customer due diligence.

• Customer due diligence (MSBA):• When providing money-changing services involving

an amount equivalent to RM3,000 and above; or• When providing remittance services.

• Identify and verify the identity of the customers and beneficial owner – name, NRIC/passport number, residential or mailing address, date of birth, nationality, purpose of transaction, corporate documents, resolutions

• If there is any doubt as to the identity of any person – conduct a basic background search

• Display a notice on the requirements of customer due diligence in a conspicuous place

• Customer due diligence (MSBA):• When providing money-changing services involving

an amount equivalent to RM3,000 and above;• When providing remittance services;

• For higher risk of money laundering or terrorism financing (eg. non-resident, nominees, unusually complex corporate structure, high net worth individuals):• Inquire on the source of wealth or source of funds;• Get approval from your senior management before

establishing business relationship with such person.

• Ongoing customer due diligence (MSBA):• Ensure that the transactions being conducted

are consistent with the knowledge on the customer;

• Ensure that documents, data or information collected is kept up-to-date and relevant.

• Red flags:• Customer is unwilling to provide information

when requested;• Customer is using different identifications when

conducting various transactions;• Customers are trying to break up large cash

transactions into multiple small transactioons;• Remittance from multiple customers to the

same beneficiary;• Customer frequently exchanging foreign

currencies but not exceeding the equivalent of RM3,000 for each transaction.

• Failure to satisfactorily complete customer due diligence:• Shall not commence business relations /

terminate business relations;• Consider whether a suspicious transaction

report needs to be lodged.

• Reporting Institution• Board of Directors• Senior Management• Compliance Officer• Employees • Audit

Essential Considerations in a Contract

• What is a contract?

• Terms of Use of website

• Elements of a valid contract• Intention to create legal relations• Offer• Acceptance• Consideration• Certainty • Capacity• Consent

• Execution of agreement electronically

• Digital Signature Act 1997• Digital signature

• Electronic Commerce Act 2006 (not applicable to negotiable instrument)• Electronic signature• Electronic message

Joint Venture

• Shareholders Agreement

• Should you have a Shareholders Agreement?

Joint Venture

• Shareholders Agreement• Rights and obligations of each Shareholder• Degree of board and shareholder participation• Moratorium• Deadlock and Exit rights• Distribution of dividends• ESOS• Fundraising

Key Concepts in a Fundraising

• What is a Term Sheet?

• Should it be legally binding or not?

• What agreements do I sign simultaneously with the Term Sheet?

• What are the transaction documents?

• What is due diligence?

• Exclusivity period

• Do promoters need to engage their own lawyers?

• Equity or debt?

• Ordinary shares or preference shares?

• If there are multiple investors, should they be on similar terms?

• Fixing a realistic valuation

• Waiver of pre-emption rights

• Board resolutions / shareholder resolutions for the issuance of shares

• Prior approval / notification in respect of the fundraising

• Allocation of board seats to the investors / board observer

• Reserved matters

• Representations and warranties

• Right of first refusal

• Tag-Along Rights

• Drag-Along Rights

Conclusion

• Get it right from the beginning!

• Ignorantia Juris Non Excusat

• Engage in discussions with the regulators

• Seek professional advice

• If you are growing regional, understand the laws of the foreign jurisdictions

Thank you!

Teoh Huei Wen

Associate, Corporate & Commercial Practice GroupT 6 03 7887 2702

E hueiwen.teoh@mahwengkwai.com

www.mahwengkwai.com

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