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THE LAW OFFICE: Foreign banks' representative offices

| 10/18/2008 12:00:00 AM | GARY LACHMAN

GARY LACHMAN

Did you ever walk around town and wonder why and how there can be so many foreign banks? Now you can ponder what will become of many of them in light of the current financial and banking crisis. Of particular curiosity are all the little offices of foreign banks that you can see in the towers of Maslak and Levent. These are known in the financial sector as Representative Offices, or simply Rep Offices. In Turkey, banking and Rep Offices are regulated by the Banking Regulatory and Supervision Agency, often referred to as “BRSA”.

According to the applicable banking legislation, if a foreign bank or financial institution wishes to conduct banking activities in Turkey, it should be duly authorized by the BRSA to operate as a bank or branch. On the other hand, Rep Offices are not entitled to conduct any banking activities, but solely to advertise, to strengthen relations of the foreign bank with financial or credit institutions established in Turkey, and to conduct market research.  

Non-bank banks?

BRSA discovered that some foreign banks and financial institutions were ignoring legislative prohibitions and using their Rep Offices to offer banking services in Turkey. In response, the BRSA decided to establish a transparent structure for Rep Offices and to heighten its scrutiny of compliance by issuing a Communiqué this past spring. The Communiqué prohibits Rep Offices from engaging in any profit or expense-generating activities (such as accepting deposits or participation funds), extending credit, or conducting other typical banking activities. Expenses required for their general and administrative operations are allowed and donations are permitted. A foreign bank or financial institution must not authorize a Rep Office to extend credit or enter into an obligation in its name or on its behalf. Employees of Rep Offices are not even allowed to access the computer systems of their parent bank or of any other bank or financial institution for the purposes of conducting these prohibited activities.

Although there are no publicly available disclosures of the BRSA based upon the Communiqué, the reporting and notification requirements introduced by the Communiqué evidence their intention to closely monitor the activities of Rep Offices. Their purpose is to gain a better understanding of the REP Offices' workings and, if necessary, to crack down on unlicensed activities. BRSA's attempt to scrutinize Rep Offices' factual scope of activities is in line with their heightened scrutiny of “suitcase banking” or active cross-border marketing activities of foreign banks in Turkey.

Better than the CIA

This primarily involves close monitoring of contacts and personnel of Rep Offices. The Communiqué requires Rep Offices to provide the BRSA with information on a semi-annual basis on their activities, including contacts with individuals and entities residing/established in Turkey, and on all visitors from foreign banks or financial institutions, the reasons for their visits and correspondence conducted with these visitors. The contacts may include meetings in person, telephone conversations, and e-mail correspondence. This raises the obvious question of whether every single contact made by the Rep Office is to be reported to the BRSA. It is noted that all “substantial contacts” are required to be reported to the BRSA, but no definition of that term is provided.

Of course this may all become “OBE” (one of my favorite State Department acronyms for Overtaken By Events) due to the current financial crisis. Under the Communiqué, Rep Offices are prohibited from acting like real banks; i.e. making loans and generating profits. That may become easier to comply with than they originally thought.

© 2008 Gary S. Lachman

 

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