Key Laws and Regulations
The principal law regulating the banking sector is the Law of the Republic of Armenia (RA) On Banks and Banking (Banking Law), under which the registration and licensing of banks and Armenian and foreign banks’ branches, and representations, corporate governance, banking, and financial operations are regulated.
The formation and procedures of corporate governance bodies, as well as the scope of authorities, are regulated by the rules determined under the Law of RA On Joint-Stock Companies, even where the bank is a limited liability company or a co-operative bank (currently all banks established and acting in Armenia are joint stock companies).
The peculiarities of liquidation of banks are subject to the regulation of the Law of RA On Bankruptcy of Banks, Credit Organisations, Investment Companies, Investment Fund Managers and Insurance Companies.
The following laws of the RA regulate the specifics of banking activities.
There are a number of laws that are applicable to banks and banking activity, for instance:
A lot of technicalities and details related to banks and banking activities are regulated under the regulations adopted by the regulator. For instance, Regulation 1 is on Registration and Licensing of Banks and Branches of Foreign Banks, Registration of Bank Branches and Representative offices, qualification, and registration of managers of banks and branches of foreign banks. Regulation 2 is about regulation of banking and prudential standards of banking.
The Central Bank of Armenia (CBA) exercises regulatory authority over all financial systems in Armenia, including banks and banking activities. The CBA also has authority with regard to registration and issuance of banking licences. The Commission on protection of competition of Armenia has authority with regard to the permission concentration of banks.
According to the Banking Law, a bank is a legal entity entitled to perform banking activities based on a licence. Banking activities are defined as accepting or soliciting deposits and using those amounts to provide loans or to invest on its behalf.
A banking licence is the only type of licence that gives holders the right to perform banking activities.
The list of activities that an entity is permitted by the banking licence to perform are the following:
Banks cannot pursue the following business activities: industry, trade and insurance.
The CBA may allow the banks to perform activities and operations beyond those listed, provided that:
A banking licence can be obtained if the CBA:
Submission for Preliminary Consent
The initiating party (bank’s shareholder) or foreign bank (for a foreign bank’s branch in Armenia) may apply for preliminary consent to licensing by submitting the following to the CBA:
The factors that may lead to the rejection of an application are linked to the financial criteria, compliance with the laws and regulation, and reputation.
For the registration of a bank or a branch of a foreign bank, the following must be submitted to the CBA:
The registration of a bank may be rejected, for example, in the following circumstances.
A registered bank may apply to the CBA for a banking licence within one year of receiving preliminary consent, and it must comply with the following requirements, among others:
The CBA may reject a request for a banking licence if the conditions have significantly changed since the issuance of preliminary consent to licensing, the bank’s management has undertaken illegal discrediting deeds after the registration of the bank, or the financial status of significant shareholders has changed.
Classification of Shareholders
According to the Banking Law, a shareholder may be significant or insignificant. Significant shareholding may be direct or indirect. Significant shareholding is direct if one holds 10% or more of the voting shares in the statutory capital of the bank. The significant shareholding is indirect if the holder satisfies one of the following conditions.
While acquiring significant shareholding through one or various transactions (ie, those concluded outside of the stock exchange or through stock exchange but exceeding 20% of a bank’s statutory capital) a person or their affiliate must have the CBA’s preliminary consent. The following information must be disclosed to the CBA when requesting preliminary consent:
Physical entities permanently residing or acting in offshore zones as per the CBA’s list, as well as legal entities or entities with no legal status determined or incorporated there and related parties may acquire participation in the statutory capital of a bank (regardless of the extent of the participation) through one or various transactions only if preliminary consent was granted.
The CBA’s preliminary consent is required for each new transaction purporting to increase the shareholding of person and/or affiliate thereof in excess of 10%, 20%, 50% and 75%, respectively.
The CBA’s preliminary consent must also be issued for transactions under which the participation of the significant shareholder decreases from 75%, 50%, 25% and 10% respectively.
The reasons for rejection of preliminary consent are usually linked to reputation, prudence, competition or general legal non-compliance.
The bank’s corporate governance bodies are:
The bank must have a chief accountant, an internal audit department, a person responsible for risk management and a person responsible for compliance.
Managers (management staff) of the bank are:
The General Meeting of Shareholders
The general meeting of shareholders is the supreme managing body of the bank. The status, authorities and operation of this corporate governance body is regulated by the Banking Law, the Law on Joint Stock Companies, the charter and internal regulation on the bank's operation (if adopted by the bank).
Shareholders may participate in the meetings in person or by representative. The general meeting exercises only its exclusive authorities defined under the law.
The bank's board carries out the general management of the bank's activities. The board acts in accordance with the line of procedures defined in the laws, the charter of the bank, and internal acts regarding board procedure. The list of issues over which the board has competency is prescribed under the law. At least once a year, the board must examine the external audit(s), and at least once per quarter, it must examine the report of the internal audit, the executive director and the chief accountant.
Executive Governance Body and Other Managers
The executive director and directorate (if any) exercise the powers of day-to-day management of the bank. Also, the executive director and directorate have authority regarding the issues not within the capacity of the general meeting, the board or the internal audit.
The other managers of the bank are responsible for the specific areas of bank activity as per their job titles and descriptions.
The bank's board must consist of at least five and at most 15 members. The members of the board are elected by general meeting and/or appointed by a shareholder or group of shareholders holding 10% or more of the voting shares. The board member must be a natural person and may be a member of boards of other banks.
Board members must have relevant experience of six years in banking, insurance or the securities market, three of which must have been spent holding one of the following positions:
A board member cannot be the member of an executive body or hold another position in the bank.
It is prohibited to appoint a person to a managerial position if they:
Under the law, the board is entitled to appoint the executive director, their deputies, the members of directorate, and the chief and members of internal audit. The authority of appointment of the other managers is subject to determination under the charter.
Generally, an acting manager can be appointed without qualification or registration for a period of three months, within which the qualification and registration processes must be fulfilled. In some cases, certain managers may be appointed as an acting manager for a period longer than three months, for instance, the deputy of an executive director may be appointed executive director in this way.
It is mandatory that the following managers have a CBA qualification certificate or confirmation from the CBA of their qualities:
The managers of the bank must be qualified and must meet the standards of professional compliance defined by the applicable law. The process of such qualification is prescribed by Regulation 1.
Generally, managers can become qualified by passing the exam. The exam may be organised by the CBA or qualifying organisations.
The CBA organises the exams for:
It is important to note that the grounds for the organisation of exams by the CBA is a request of the relevant bank or foreign bank’s branch following the appointment of a person to a position. The remaining managers must pass an exam which is organised by a qualifying organisation. The CBA’s qualification certificate is issued when an exam is passed.
The board member qualification check is provided not through the exam but through a personal interview with the CBA.
The CBA recognises similar past experience of a candidate in a reputable international organisation and will make an exception with regard to passing the exam for such a candidate. There are a few other cases stipulated under Regulation 1 where the exams are replaced by the procedure of confirmation of qualification through other tools.
The CBA registers the managers to whom the requirements of a qualification certificate or checking are applicable, except for dealers.
The registration of the board member follows the qualification interview in the CBA. The CBA shall be notified of an appointment of a chairperson and their deputy.
The managers other than board members are registered based on the relevant pleading of a bank and successfully passing of the registration process. The registration process for an executive director and their deputies, members of directorate, a chief accountant and their deputy and a chief of internal audit is sophisticated, which means that the CBA performs compliance assessments and requires a personal interview of each candidate.
The regulation adopted under Armenian legislation regarding remuneration is that the CBA may limit a bank’s payment of bonuses and other incentive payments in the following cases:
The main statutory regulations on AML and CFT for banks is the law on Combating Money Laundering and Terrorist Financing. Banks also follow recommendations established by the CBA and relevant international institutions.
The banks are obliged to have internal acts regarding AML and CFT, such as policies, risk assessment regulations, and KYC processes.
The banks are obliged to:
If the transaction is suspicious, a bank may suspend it and report it to the regulator, and it must then act as per the instructions of the regulator.
The transactions subject to mandatory reporting for banks are:
Transactions or business relationships, including attempted ones, are suspicious if it is suspected, or there are reasonable grounds to suspect, that the property:
Administrator and Funding
The Deposit Guarantee Fund of Armenia (the “Fund”) is a non-commercial legal entity established by the CBA to which all banks must pay regular (calculated based on total attracted deposits and payment is made quarterly), non-regular (for newly-established banks) and extra (upon decision of the Fund in case of insufficiency of funds) contributions.
The Fund is responsible for management of funds, as well as payment of compensation where there is a “compensation event”.
The guarantee of deposit compensation covers deposits within the following limits:
In the following cases, the guarantee on compensation is not provided:
It is important to note that the deposit, within the meaning of its guaranteed compensation, refers to:
A compensation event occurs when:
The CBA notifies the Fund about the compensation event, as well as providing the list of deposits subject to compensation. The Fund provides public notice regarding compensation and pays compensation should the depositor apply for it within three years of that public announcement.
Bank secrecy is the information belonging to a customer of which a bank becomes aware while establishing or carrying on a business relationship with its customer, such as customer account information, information on the transactions made upon the instruction of the customer or in favour of the customer, trade secrets, facts related to any project or plans of its activity, inventions, industrial designs, and other information that the customer intended to keep secret where the bank is aware or could have been aware of this intention.
The information that becomes known to the CBA in connection with or during the supervision of banks also becomes classified as bank secrecy; the CBA is deemed as a bank and the banks are the customer).
The general rule is that disclosure of bank secrecy is prohibited. The breach of this rule may incur criminal liability. However, there are certain cases prescribed under the law when the disclosure of bank secrecy is allowed, some of which are subject to some conditions. Those cases are the following.
The violation of bank secrecy rules may lead to the civil liability (compensation of damages), administrative penalties (from AMD2-10 million), and criminal liability.
Basel III implementation
The Basel III standards on counter-cyclical capital buffer were implemented in the procedure on Setting and Calculation Thresholds above the Capital Adequate Ratio of Banks, which was adopted by the CBA on 1 April 2019.
Risk Management Rules
Risk management in banks is regulated under the CBA’s Regulation on Minimum Conditions of Performing Internal Control in Banks. The CBA has also given recommendations regarding management of banks’ operational and liquidity risks.
The bank’s risk management system must at least consist of the following:
Banks are required to implement stress testing for the following risks at least:
The CBA recommendation stipulates that the operation risk management of a bank relies on the following principles:
The CBA’s recommendations on liquidity risk management defines 20 principles, including that a bank must implement a strategy for the daily management of liquidity.
The minimum statutory capital of a bank is AMD50 million, which may be paid only in Armenian drams. The minimum total capital required for a bank is AMD30 billion. The total capital is the sum of core capital and additional capital; however, the amount of core capital in this sum must not be more than 30% of the total capital. The core capital consists of a total sum of specified amounts (eg, statutory capital, non-distributed dividends, reserve funds) including specified expenses or property valuation (eg, buy-back shares).
The ratio of the core capital to risk weighted assets must be 9%, while the ratio of the total capital to amount of risk weighted assets is 12%.
The counter-cyclical capital buffer rate is 0%. The capital conservation threshold rate for 2022 is 1.5%; for 2023 it will be 2% and it will become 2.5% in 2024.
The general rate of liquidity is 15%. The current rate of liquidity is 60%. The standard of liquidity cover is 100%. The pure financial standard is 100%. The standards may differ depending on the asset classification or currency involved in calculation.
Additional Requirements Applicable to Systematically Important Banks
For systemically important banks, the threshold is at the rate of 1% for 2022 and will become 1.5% as of 2023.
Insolvency, Recovery and Bankruptcy
The deterioration of the financial state of a bank may cause either recognition of its insolvency or bankruptcy.
The CBA recognises a bank as insolvent if one of the following apply:
While recognising a bank as insolvent, the CBA may exercise one of the following rights:
The aim of appointing a head of temporary administration is to restore the financial stability of the bank, which the temporary administration performs through various tools, such as the reorganisation of the bank, selling the bank’s assets, short-term collection of bank assets, and attraction of new investments. A head of temporary administration becomes and acts in the capacity of the executive director of an insolvent bank.
During administration, the participator (shareholders) of the bank cannot exercise their rights arising from such participation, for example to separate their part (deposit) of the authorised capital of the bank or to separate the shares of the participator (shareholder, unit holder) in the authorised capital of the bank.
The administration shall operate according to the financial recovery plan adopted by the CBA. The CBA may freeze the satisfaction of claims of creditors of the bank (moratorium) for the entire period of activities of the administration (or, where necessary, for a shorter period). The administration has the right to unilaterally terminate the agreements or apply to court to invalidate them.
The CBA must terminate the activities of the administration where:
Recognising the insolvency of a bank, or when the CBA concludes that bankruptcy will be a more effective tool to keep the bank’s assets rather than to continue its administration, the CBA may apply to the bankruptcy court for bankruptcy of a bank. The creditors of the bank may petition the CBA to apply for bankruptcy. Before applying to the court for bankruptcy, the CBA revokes the bank's licence. The bank will become bankrupt where the court decides this. Upon the decision of a court on a bank’s bankruptcy, the liquidation of the bank will follow.
Liquidation of a Bankrupt Bank
When the bank is recognised as bankrupt, the appointed liquidation administrator is appointed by the court. From the notification of a bank’s bankruptcy administrator, creditors may register their claims against the bank. The sequence of satisfaction of claims of creditors is as follows:
Companies (legal entities) may be subject to criminal liability from January 2023; this will include banks as well.
Examples of financial crime for which a company may be charged are:
For a legal entity, commission of a crime may lead to criminal liabilities, such as payment of fine, temporary suspension of the right of performing certain activities, compulsory liquidation or prohibition of doing business in Armenia.
As at December 2022, the succession of criminal liability is not regulated under the Criminal Code.
The legal entity may avoid criminal liability should its shareholders take reasonably necessary measures to prevent crime from being committed by persons who may have influence over the legal entity’s activities or decisions.
The concept of criminal liability of a company is a new one for the Armenian legal system, and it is rather difficult to assess its possible impact on the market in general or specifically on the financial market. Nonetheless, the change is expected to cause positive changes in the market rather than negative ones.
Banking regulatory rules do not address ESG matters. However, Armenian banks may address ESG matters under their policies and other internal regulations, and some of them currently practise this, at least in relation to the environment. A bank may include ESG-related clauses in a loan agreement with creditors where it is required under the contract of attracting funds for those loans, in which case environmental and governance considerations are usually addressed.
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