compliance & enforcement annual report 2020...register of licensed financial institutions on...

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Compliance & EnforcementAnnual Report 2020For the period ended December, 2020

Capital Markets Supervision DirectorateCentral Bank of Bahrain

February2021

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February2021

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February2021

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Compliance & Enforcement Annual Report 2020

Table of Contents

1. Introduction.....................................................................................................2

2. Compliance Status 2020 .................................................................................3

2.1. Listed Companies .....................................................................................3

Figure 1 ..............................................................................................................3

Table 1 ...............................................................................................................4

Table 2 ...............................................................................................................5

3. Key Case Handling & Escalation ...................................................................5

Table 3 ...............................................................................................................5

4. Complaint Handling & Public Awareness Initiatives ....................................6

Figure 2 ..............................................................................................................6

5. CBB’s Regulatory Response to COVID-19 ...................................................7

Table 4 ...............................................................................................................7

6. Conclusion ....................................................................................................11

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1. Introduction

The Capital Markets SupervisionDirectorate’s (the “CMSD”) regulatorymandate is to set and enforce high qualitycapital market industry standards, protectinvestors and strengthen market integritywhile supporting a stimulating capitalmarkets’ ecosystem. The Investigation andEnforcement (“IE”) team within theCMSD assumes responsibility to ensureeffective enforcement of the Central Bankof Bahrain’s (the “CBB”) regulatoryrequirements, in order to achieve fairness,transparency, investor protection andsafeguard public interests in the Kingdomof Bahrain.

In pursuing these mandates, IE aims toinstitute a fully-fledged proactiveenforcement regimen that ensures thefulfilment of CMSD’s requirements bylisted companies, self-regulatoryorganizations (“SROs”) and the relatedlicensees. Accordingly, given eachdepartment’s invaluable role, the CMSD asa whole, strives to continue to instil andintegrate the compliance and enforcement

function, directorate-wide. The CMSDbelieves that this inclusive view ofenforcement strengthens and enhances theefforts expended to protect the integrity ofthe capital markets.

This annual report provides a comparativeoverview of CMSD’s efforts in 2019-2020to identify and address non-compliances,negligence or misconduct, by accountingfor all market participants in order to enactthe word of the law, safeguard the interestsof all stakeholders and ensure a stimulatingenvironment within which the needs ofmembers, investors and the regulator aremet.

This is particularly important due to theexceptional nature of the year 2020 withthe implications of the Coronavirus(“COVID-19”) pandemic being felt bothlocally and globally, giving rise tounprecedented challenges and risks,testing the financial system’s operationalresilience, business continuity planningand cyber-security, among other things.

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2. Compliance Status 2020

With reference to MIE-3.1.8 of the Market Surveillance, Investigation and Enforcement(“MIE”) Module of Volume 6 of the CBB Rulebook, in deciding on any given regulatory andenforcement response, the CBB is dependent on examining the circumstance of eachindividual contravention against Decree No. (64) of 2006 with respect to promulgating theCentral Bank of Bahrain and Financial Institutions Law (“CBB Law”) and the MIE Module.The CBB’s approach is three-way, in that the gravity of each respective contravention isassessed, the concerned person’s/entity’s compliance track record is examined and finallyremedial measures to prevent future contraventions are evaluated and consequently instituted.Accordingly, this section will examine the most recent cases of contraventions of the CBBLaw, the CBB rulebook requirements or any other regulations and resolutions issued inconnection with implementing thereof.

2.1. Listed Companies

Most Recurring Contraventions by Type

Figure 1 below illustrates the overall trend of CMSD-addressed contraventions (includingthose to which it issued Non-Compliance Letters (“NCLs”), Notices, Formal Warningsamong other things) in the years 2019-2020 across listed companies:

Figure 1

12%

12%

41%

21%

3%

12%

17%

9%

14%

9%

20%

31%

0% 10% 20% 30% 40%

Other

Content of Financial Statement / Press Release

Failure to Disclose Board Meeting Date or Changethereto to the Market

Failure to Notify CMSD of Change in Board ofDirectors/ Senior Management and/or Announcing

the same to the Market

Non-adherence to Offering of Securities'Requirements

Submission of Register of Interest

Submission of Annual Verification Report

Listed Company Contraventions by Type (2019-2020)

2019 2020

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As illustrated above, more than half of contraventions across listed companies for 2019related to periodic returns, namely the Submission of Annual Verification Report along withthe Submission of Register of Interest, these are followed by an additional date-sensitivecontravention, Failure to Disclose the Date or Change thereto of the Meeting of Board ofDirectors.

In 2020 however, the most common non-compliances were concentrated on the Failure toDisclose the Date or Change thereto of the Meeting of Board of Directors, making up close tohalf of all 2020 contraventions and almost tripling in number from 2019. This is followed byFailure to Notify the CMSD of a Change in Board of Directors / Senior Management and/orAnnouncing the same to the Market, making up almost a quarter of all 2020 contraventions.

Table 1 below outlines the abovementioned cases further:

Table 1Listed Company Contraventions by Type (2019-2020)

Contraventions by Type 2020 2019Content of Financial Statement / Press Release 4 3Failure to Disclose Board Meeting Date or Change thereto to the Market 14 5Failure to Notify CMSD of Change in Board of Directors/ SeniorManagement and/or Announcing the same to the Market 7

Non-adherence to Offering of Securities' Requirements 1 3Submission of Register of Interest 4 7Submission of Annual Verification Report 11Other 4 6

Declaration of Annual Dividend 2 1Non-adherence to Insider Policy Trading Requirements & Takeovers,Mergers & Acquisitions' Requirements 1

Non-adherence to Market Making Requirements 1Non-adherence to Treasury Share Transactions' Requirements 2Publication of Financial Statement 1 1Unacceptable Conduct when Dealing with the CBB 1

Grand Total 34 35

As outlined in the above table, total non-compliances by listed companies in 2020 (34contraventions) has decreased from 2019 (35 contraventions) by 1 case only.

Temporary Suspension of Trading

The CBB may decide to suspend securities’ trading in the interest of the public and for theprotection of investors. Table 2 below denotes the notable suspension cases of 2019-2020:

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Table 2Suspension Cases (2019-2020)

Nature of Suspension ListedCompany

2020 2019

Publication of Financial Results ITHMR 1GFH 1

Publication of Highlights on Financials Prior toPublishing Financial Statements APMTB 1

Pending Announcement on Recommendation ofDeclaration of Dividends ESTERAD 1

Disclosure of Material Corporate Information ARIG 2ITHMR 1SALAM 1BISB 1

Grand Total 4 5

3. Key Case Handling & Escalation

The table below details key cases handled by CMSD-wide departments as well as thosereferred for escalation during the years 2019-2020:

Table 3Key Cases (2019-2020)

Year Violator SubjectEnforcement

Outcome2019 SRO Late Submission of Financial Statements Formal Warning

Late Submission of Financial Statements Formal Warning

Non-Compliance with CMSD’s Instructions Formal WarningListed Company Non-adherence to Offering of Securities

RequirementsFinancial Penalty

Unacceptable Conduct when Dealing with the CBB Formal WarningLicensed Broker Non-compliance with CBB’s Rules and Guidelines Formal Warning

2020 Listed Company& LicensedBroker

Non-adherence to the requirement that Key Personstrade through in-house brokerage only

Formal Warning

Listed Company Non-disclosure of the Board of Directors’ meetingdate for the first quarter of the year 2020-2021

Non-ComplianceLetter

Licensed Broker Breach of Pre-arranged Trading Prohibitions Formal WarningLicensedCrypto-AssetService Provider

Appointment of External Auditor Prior to ObtainingCBB’s Approval

Non-ComplianceLetter

LicensedCrypto-AssetService Provider

Late Filing of Annual Audited FinancialStatements, Non-Adherence to NotificationRequirements for Anticipated Delays in SubmittingDate-Sensitive Requirements and Non-Compliancewith Enhanced Due Diligence Requirements

Non-ComplianceLetter, FormalWarning & Per DiemFinancial Penalty

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4. Complaint Handling & Public Awareness Initiatives

The CMSD places great importance on complaints which relate to potential cases ofcontravention of the CBB Law, rules and regulations or SRO’s business rules. The belowfigure outlines a breakdown of the complaints handled by the CMSD in 2020:

Figure 2

While carrying out its examination of complaints received, the CMSD endeavours, whereapplicable, to issue press releases, as an effective way of raising public awareness,reinforcing confidence in the financial system and reducing risks and financial crime.Accordingly, in 2020, the CBB issued one press release relating to an examined complaint:

Through such press release CBB warned consumers against dealing with unlicensed financialinstitutions that claim to offer investment in securities, particularly as they were also flaggedby other overseas authorities for engaging in unlicensed capital market activity. The pressrelease further stressed the need for consumers to ensure the utmost care and caution, andtake into consideration the risks, when investing, dealing or trading any amounts in securitiesor foreign exchange with any person, persons, institutions, companies or websites, includingsocial media, and ensuring that they hold the necessary licenses from the Central Bank ofBahrain to engage in such activities. Ultimately, consumers were encouraged to visit theregister of licensed financial institutions on CBB’s website (www.cbb.gov.bh) in order toensure the above.

13%

13%

13%

13%

25%

13%

13%

Capital Markets' Related Complaints Handled, 2020

Unauthorized Securities' Activities by FraudulentInstitution

Crypto-Asset Trading Account TemporarySuspension

Unclaimed Dividends from Listed Company

Conduct During Listed Company AGM

Crypto-Currency Transfer Technical Issues

Erraneous Disclosures to Court

Delay in Dividend Payment

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5. CBB’s Regulatory Response to COVID-19

The recent outbreak of the COVID-19 pandemic has proven to be a profound health andhumanitarian crisis that is also fundamentally challenging the financial and operational agilityof the global capital markets industry. In the face of such disruption to the capital marketsresulting from the macroeconomic impact of COVID-19 on the global economy and pursuantto the preventive measures implemented by the government of the Kingdom of Bahrain tocombat the outbreak, the Central Bank of Bahrain (including its Capital Market SupervisionDirectorate) issued a number of circulars tackling various areas of focus, from safetyguidelines, to emphasis on licensees’/listed companies’ responsibility to implementprecautionary measures to safeguard the market functionality, to the implementation ofvarious relief measures (including the exemption from preparation and publication of the firstquarter’s financial results) as a form of regulatory flexibility to help market participantsaddress the challenges posed by COVID-19 while ensuring that market integrity and investorprotection principles are maintained.

These regulatory responses reflect the CBB’s commitment to ensuring that the capitalmarkets, among other financial ecosystems within the Kingdom, continue to functionthroughout this difficult period in an open and orderly manner. In summary, the belowprovides an outline of the CBB’s main regulatory responses to COVID-19, in the form ofissued circulars:

Table 4Regulatory Response Measures to COVID-19

Date ofIssuance

Circular Recipient Summary

29th

September2020

Proof of ResidencyPermit(OG/328/2020)

AllLicensees

Given the current COVID-19 pandemic, theNationality, Passports and Residence AffairsDirectorate at the Ministry of Interior will not beissuing the residency permit sticker for expatriatesanymore. However, a proof of residency permitissued by the Labour Market RegulatoryAuthority (LMRA) will substitute the residencypermit sticker during the current situation.Therefore, the permit issued by the LMRAshould be considered sufficient for KYCpurposes.

14th July2020

Reporting ofFinancial Impact ofCOVID-19(Ref. OG/259/2020)

-All ListedCompanies-AllLicensees

As part of the CBB’s objective to maintaintransparency amidst current implications ofCOVID-19 and given that businesses haveincreasingly become vulnerable to financiallosses, in this circular, the CBB required listedcompanies and licensees to disclose thefinancial impact of COVID-19 in their interimand annual financial statements starting forstatements ending 30th June 2020. For thosecompanies which are not required to produceinterim financial statements, such disclosure willonly be in their 2020 annual financial statements.For listed companies, such disclosures must bemade through a supplementary public disclosurethat must be published on the Bahrain Bourse

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Regulatory Response Measures to COVID-19Date of

IssuanceCircular Recipient Summary

website in addition to the inclusion of suchdisclosure in the financial statements.

To assist companies in determining the financialimpact, the financial value should be derivedbased on any reduction in values of any specificasset(s), sales and revenues, liquidity, etc. orincrease in expenses, commitments, etc. as adirect impact from COVID-19 and bearing inmind any financial benefits derived fromgovernment support schemes. Such exercise mustbe made in cooperation with their externalauditors.

27th May2020

Money Laundering& TerroristFinancing Risks &Practices duringCOVID-19 (Ref.EDFIS/C/052/2020)

AllLicensees

The CBB issued the attached guidance paperbased on the “COVID-19 related MoneyLaundering and Terrorist Financing Risks andPolicy Responses”, a paper published by theFinancial Action Task Force (FATF).

All licensees were urged to read the FATFguidance paper in this regard and establishadditional measures based on a review of theinternal processes and systems as appropriate.

8th April2020

Additional COVID-19 PrecautionaryMeasures(Ref. OG/148/2020)

AllLicensees

CBB required all licensees to adopt the followingguidelines: Working from home approach must be

implemented, as extensively as possible; The number of employees working at

various offices/branches must be reducedas much as possible, and the employeesworking from offices must ensure adherenceto health and safety guidelines issued recentlyby the CBB as well as social distancingmeasures; and,

The number of employees using corporatemeans of transportation, such as companybuses, must be reduced.

1st April2020

Market Fairnessand Integrity AmidCOVID-19Developments(Ref.CMS/C/011/2020)

All ListedCompanies

The CBB emphasized the importance of listedcompanies’ compliance with the requirements ofCorporate Governance and Controls, DisclosureStandards and the Prohibition of Market Abuseand Manipulation Modules of the CBB Rulebook.As such, the CBB reiterated the followingresponsibilities: As the capital market participants have put in

place remote access mechanism in order toensure continuity of business, listedcompanies are to be vigilant that allmaterial non-public information is retainedconfidentially and safeguarded against illegalacts, particularly in relation to insider trading.

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Listed companies are to be mindful of theirobligations in relation to immediatedisclosure of material information in orderto protect investors and avoid withholdingmaterial information that would attribute to amisinformed market.

The CBB further reaffirmed its support to alllisted companies with relief measures as necessaryto aid them in facing these unprecedentedcircumstances, however such measures do notexempt listed companies from their ethicalresponsibility and obligation of compliancewith the CBB rules and regulations.

30th

March2020

MarketIntermediariesResponsibilityAmid COVID-19(Ref.CMS/C/010/20)

SROMembers

The CBB emphasized the significance of marketintermediaries’ implementation of precautionarymeasures and safeguarding the marketfunctionality as a fair and transparent market andadvised them to be mindful of the followingresponsibilities towards the market amid COVID-19: Disclaiming Current Market Risks: Market

intermediaries are instructed to communicatedisclaimers to investors through theirelectronic or traditional channels with the aimof educating and informing investors on thecurrent risks in the markets and the rapiddevelopments leading to higher volatility.

Monitor and Report Fraudulent andSuspicious Activity: Market intermediariesare responsible for monitoring and reportingattempts of fraudulent acts, investment scamattempts, market abuse and manipulationattempts and other suspicious activity to theSRO and/or the CBB, as governed by therelated regulations and requirements.

Strengthen Communication Lines: Allmarket intermediaries are advised to ensurethat communication lines with the SRO,market participants and the CBB arestrengthened. This is crucial to allow marketintermediaries to communicate with the SROand the CBB any updates in relation tomaterial market developments, disruptionsand urgencies and follow-uprecommendations to ensure marketfunctionality.

30th

March2020

Exemption for FirstQuarter FinancialResults Preparationand Publication

-All ListedCompanies-All LocallyIncorporated

The CBB exempted all listed companies andlocally incorporated banks from thepreparation and publication of their quarterlyreviewed financial results for the first quarter

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(Ref. OG/124/2020) Banks of 2020. Accordingly, the first reviewed financialstatements that must be prepared and published in2020 would be the June 2020 six months periodstatements.

26th

March2020

Services ContinuityMeasures(Ref.EDFIS/C/032/2020)

-SROs-SROMembers-Crypto-AssetLicensees

Due to the current circumstances, and that alllicensees shall continue to function, therefore alllicensees were required to ensure and confirmto the CBB the readiness and reliability of theirBusiness Continuity and Disaster RecoveryPlans. The CBB requested that all licenseesprovide a briefing regarding their current planin respect of the measures taken so far to assureun-disrupted operations during these timesincluding but not limited to the following: Remote access; Readiness to service clients remotely and

through other means; and, Reliability of systems, controls and

technology in place.Licensees were expected to report back to theCBB with the above requirements no later than 2nd

April 2020.19th

March2020

Upcoming GeneralMeetings (Ref.OG/108/2020)

-All CBBLicensees-All ListedCompanies

The CBB issued the following safety guidelinesregarding the upcoming general meetings todiscuss the financial results for the year ended 31st

December 2019: All CBB licensees and companies whose

shares are listed on the Bahrain Bourse shallcomply with the decisions of the governmentspecifically in relation to limiting all publicgatherings to 20 people or fewer.

The CBB instructed all licensees and listedcompanies, whose general meetings will beunfeasible to comply with the aboveinstruction, to convene the general meetingvia electronic or teleconferencing means.Companies shall exhaust all avenues to havethe electronic/teleconferencing procedures inplace for the meeting to assemble on thescheduled date and time. Alternatively, thegeneral meeting may be rescheduled,however, no later than 30th April 2020.

Listed companies may liaise with BahrainClear B.S.C. (“Bahrain Clear” or “BHC”)to facilitate their general meetings, asBahrain Clear has developed and set upappropriate teleconferencing measures.

Licensees and listed companies that intend tohold board elections in their upcominggeneral meetings shall postpone the electionuntil a subsequent general meeting is

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convened. The board of the concernedlicensee/listed company shall request anextension of their appointment for a periodof no longer than 6 months from the CBB orMinistry of Industry, Commerce and Tourism,as the case may be.

The representatives of the CBB shall attendthe general meetings via the arrangedteleconferencing means and as such, licenseesand listed companies are required tofacilitate the necessary arrangements toeffect the same.

11th

March2020

DisinfectionInstructions (Ref.EDFIS/C/024/2020)

-SROs-SROMembers-Crypto-assetLicensees-All ListedCompanies

The CBB requested that all licensees follow andimplement the disinfection instructions issuedby the Ministry of Health as part of the publicawareness campaign to combat COVID-19.Licensees must report back to the CBB on suchimplementation no later than 15th March 2020.Licensees were also encouraged to engage withthe public on measures taken to ensure the safetyof their staff and customers.

6. Conclusion

The year 2020 has been an exceptional one, with the implications of the pandemic faced bothlocally and globally, fundamentally challenging the financial and operational agility of theglobal capital markets industry. In the face of such disruption and in an effort to exercisemuch-needed regulatory flexibility, the Central Bank of Bahrain as a whole and its CapitalMarket Supervision Directorate in particular, sought to institute measures and give specialconsideration to ensure orderly market functionality and assist market participants in tacklingthe ever-growing challenges posed by COVID-19, all the while safeguarding marketintegrity, transparency and investor protection.

In light of this, the CMSD continues to be committed to more carefully consider theappropriate regulatory response to potential breaches of rules or market misconduct. Seeingas each non-compliance or suspected case is unique and involves a variety of differentcircumstantial elements, the CMSD strives to be as consistent and transparent as possible inthe related decision-making. The CMSD’s most prevalent role revolves around ensuringeffective implementation and enforcement of CBB’s regulatory requirements for the capitalmarkets, as such, it continuously seeks to develop and improve its regulatory framework inline with regional and international counterparts. Ultimately, and in line with findings of thisannual report, the CMSD, alongside key stakeholders, will work to further improve standardsof compliance in the market, reduce recurrences and overall boost market awareness of itsregulatory framework – with the core objective of solidifying the efficiency of one ofBahrain’s aspired key financial drivers, the capital markets.

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