Unlicensed financial activity in Bahrain
Our Associate, Habiba Mokhtar throws light on unlicensed financial activity in Bahrain and its regulation.
Habiba Mokhtar ([email protected]) – Associate
The financial sector plays a pivotal role in Bahrain’s economic growth, acting as the largest non-oil contributor to the Kingdom’s GDP. Acknowledged as the GCC’S most established sector, Bahrain comprises of 364 local, regional, and global financial institutions. With such remarkable growth and as the market evolves, unlicensed activity can emerge as a persistent challenge. This activity can be damaging to the economy as financial institutions may inadvertently or knowingly engage in illicit activities, undermining the integrity of the financial system and efforts to combat financial crimes, which can in turn reduce consumer confidence and investment in the financial sector. With consumer protection and economic growth being at the forefront of the Central Bank of Bahrain’s (CBB) objectives, financial regulation has been approached with the aim to encourage participation in financial activity while ensuring that said activity operates within the boundaries of regulatory oversight.
Regulatory Framework
The CBB regulates the financial sector, operating pursuant to Law No. 64/2006 issuing the Central Bank of Bahrain and Financial Institutions Law (CBB Law). The CBB Law is further supplemented by the CBB Rulebook and Resolutions issued by the CBB’s appointed Governor, mostly providing sector-specific guidance. With respect to licensing, Article 40 (a) of the CBB Law provides that “No person shall carry out a Regulated Service in the Kingdom unless licensed by the Central Bank.” Generally, any institution planning to offer regulated financial services in Bahrain on a commercial basis must be granted a license from the CBB to do so. Regulated services are specifically outlined by the CBB’s Governor under Resolution No. 1/2007 concerning the services regulated by the Central Bank of Bahrain, as amended by subsequent resolutions. Said services include but are not limited to insurance, commercial investment, and banking services.
The licensing process is outlined under Articles 44 to 47 of the CBB Law, supplemented with sector-specific details under the CBB Rulebook. Overall, the licensing process includes submitting an application to the CBB, which shall verify the application to ensure that it meets all the necessary requirements. These requirements may include the legal form of the applicant, the location of the institution’s head office, the minimum capital and reserve requirements and the limits of capital adequacy requirements. Following the CBB’s approval and issuance of the license, the licensee shall be able to legally perform financial activities whether to or from Bahrain.
Consequences of non-compliance
Non-compliance with the licencing procedure by financial institutions or individuals offering financial services can give rise to both civil and criminal liability. With respect to civil liability, Article 43 of the CBB Law provides that any agreement relating to financial activity that an unlicensed individual enters into shall be null and void. This prevents unlicensed individuals from benefiting from unlawful activity and ensures that any aggrieved investor or consumer can be reimbursed for the full amount they may have lost through a civil claim.
With respect to criminal liability, Article 65 of Law No. 15/1976 Issuing the Penal Code (Penal Code) provides that if more than one legal provision applies to a criminal act, the provision containing the stricter penalty shall be enforced. Both the CBB Law and the Penal Code outline a penalty for unlicensed financial activity. Article 161 of the CBB Law provides that any individual that practices unlicensed financial activity will be liable to a fine of up to one million Bahraini Dinars, in addition to the court confiscating the proceeds of the crime. Article 391 (bis) of the Penal Code mandates a prison sentence in addition to a fine, comprising a harsher penalty, that is implemented by the courts.
Article 391 (bis) of the Penal Code specifies the following practices and their respective penalties:
- Collecting funds from third parties with the intention of investing, managing, or employing them shall be punished by both or either of imprisonment and a fine not less than one hundred thousand Bahraini Dinars and not exceeding twice the amount of monies collected or received or owed from said monies. The offender shall be ordered to refund the monies to the owner and proceeds of the crime shall be confiscated.
- Collecting or receiving monies, in the capacity of an agent or broker, or delegate, or any other capacity, from third parties for the benefit of a party that is not licensed to practice activities such as collecting and receiving monies with the said party’s knowledge shall be punished by both or either of imprisonment and a fine not exceeding fifty thousand Bahraini Dinars.
- Attempting to commit the crimes provided in paragraphs (1) and (2) of this article shall be punished by half the penalty prescribed for the committed crime.
- Sending invitations to the public, by any means of announcement, to collect or receive monies for the purpose of investing or managing or using such monies, without obtaining a license from the relevant authorities shall be punished by both or either of imprisonment and a fine not exceeding one hundred thousand Bahraini Dinars.
Article 391 (bis) (4) of the Penal Code provides offenders the ability to avoid the sentence and the imposed fines only with respect to the practices mentioned in paragraph (1) and (2) above if they refund the monies or its equivalent to the victim at the investigation stage or during the stages of the trial. This can even extend to after the issuance of the judgment, upon the approval of the execution judge if the offender refunds the monies due to the victims and requests said judge to suspend the execution of the sentence.
Application of the above article is observed in Challenge No. 352 J.Y. 2018 wherein “The defendant, knowingly provided regulated banking services, marketed, and promoted investment products in the Kingdom as an agent for the benefit of an unlicensed third party. The defendant shall be charged in accordance with Article 161 of the CBB Law and Article 390(bis) (2) of the Penal Code, with three years of imprisonment and a fine of fifty thousand Bahraini Dinars, with confiscation of the proceeds of the crime”. Without obtaining the necessary license, which ensures effective regulation by the CBB, the risk arises that institutions may foster an environment where fraud, corruption and unethical behavior can grow, which can be detrimental to the economy. Additionally, said institutions may not implement the rules and regulations designed to safeguard the interests of consumers, leaving them vulnerable to unfair treatment and fraud. The imposed sentence highlights the gravity of the crime committed effectively enforcing severe consequences for individuals offering unlicensed financial services and reimbursing the victims. Nonetheless, the above judgment portrays the consequences for non-compliance if the offender fails to reimburse the victims during the investigation, trial stage or even during the execution stage, providing a fair leeway to potentially uninformed offenders while ensuring that consumers and the economy remain unharmed.
It is imperative that any individual seeking to provide regulated financial services in Bahrain obtains the required license from the CBB to safeguard themselves from being used for financial crimes, including money laundering through the effective scrutiny of the CBB, and to avoid the possibility of imprisonment and payment of large fines. It is also best that consumers safeguard themselves from unlicensed practices by ensuring that the financial institution is licensed by the CBB, which is readily accessible in the CBB’s website under the Licensing Directory [https://www.cbb.gov.bh/licensing-directory/] to avoid falling prey to fraudulent activities.
Concluding remarks
In alignment with the CBB’s objectives, the law seems to strike a balance between protecting consumers and encouraging the establishment of institutions in the financial sector. With respect to consumers, the law ensures that investors are reimbursed with the full amount, placing them in the position they were in before the offence was committed. As for offenders, the law provides a fair leeway for said offenders to avoid imprisonment and the payment of large fines if the victims are reimbursed before, during or even after trial (upon the approval of the execution judge), while ensuring that the economy and investors are safeguarded. The current framework ensures that the financial sector can continue to grow effectively, while operating within the boundaries of regulatory oversight, ensuring stability, protecting consumers, and promoting sustainable economic growth.
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