The banking industry is primarily regulated by two pieces of legislation, Financial Institutions Act No. 2 of 1999 and The International Banking Act No. 4 of 2002. All Banks and Financial Institutions are now supervised and regulated by The Reserve Bank of Vanuatu. The Reserve Bank will only grant a license if it is satisfied to the suitability of the application.

The Financial Institutions Act No. 2 of 1999 covers licensees wishing to or currently carrying on banking business within Vanuatu.

Companies wishing to carry on International Banking business must be licensed under the International Banking Act No. 4 of 2002. They are prohibited from dealing in Vatu or with residents of Vanuatu.

Physical presence in Vanuatu

All licensees must have at least one full time employee and a physical presence (premises) in Vanuatu. The licensee must conduct its international banking business from these premises and it must maintain records of its international banking business activities at those premises.

Prior approval must be obtained for the establishment of a branch, subsidiary or office, outside Vanuatu. Such approval will only be granted if the Reserve Bank is satisfied that it can supervise the operations outside Vanuatu. The Reserve Bank can conduct on-site inspections of the operations of a licensee within or outside Vanuatu.

Supervisory requirements

• A licensee must maintain a minimum amount of capital in proportion to its balance sheet, as the Reserve Bank determines having regard to the activities of the licensee. Licensees must maintain minimum capital of not less than US$500,000 at all times.

• The appointment of directors and managers is subject to Reserve Bank approval, and such persons must be fit and proper to hold the position.

• Licensees are subject to restrictions related to large exposures and aggregate investments in shares issued by other companies.

• Licensees are restricted from providing cheque accounts or credit cards without obtaining prior approval from the Reserve Bank.

• Licensees must appoint a qualified external auditor and is subject to the prior approval of the Reserve Bank.

• Licensees are required to report suspicious transactions as required by the Financial Transactions Report Act No. 33 of 2000. top

Prudential Guidelines

Guidelines, consistent with international norms, must be followed and where appropriate the Reserve Bank will seek policy developments from the Licensee on the following areas:

• Credit Risk Management

• Loan Classification

• Liquidity Management

• Capital Adequacy

• Audit Arrangements

• Restrictions on shareholdings

• Dealings with Subsidiaries and Associates

• Large Exposures in excess of 25% of capital

• Customer Due Diligence

• Fit and Proper requirements for Management

• Physical presence in Vanuatu

• Outsourcing

Statistical Data

Banks will be required to submit quarterly statistical data to the Reserve Bank. This return will cover the following areas:

• Assets

• Liabilities

• Shareholders Equity

• Details of related party transactions

• Funds management activities

• Ten largest loans

• Ten largest depositors

• Large exposures over 10% of capital

• Ten large exposures to government

• Statement of income and expenditure

• Security investments (debt & equity)

• Past due and non-accrual loans

• Off balance sheet business

• Derivative instruments

Other returns that are required to be submitted to the Reserve Bank include a Capital adequacy return, country exposure return and a maturity profile return. top

Applications for an International Bank License

Applications for an International Bank License must be accompanied with a non-refundable application fee of US$8,000 and an annual license fee of US$8,000. If a license is refused the license fee will be refunded.

The time taken for approval or decline of an International Banking License from receipt of the application and all supporting documents and information as requested by the Reserve Bank is 4 months.

This note sets out the information that an applicant for a license to operate as an international bank is required to submit to the Reserve Bank in support of its application. The note should be read in conjunction with the requirements of the International Banking Act No. 4 of 2002.

Specifically, Section 20 of the Act requires that licensees must occupy a physical presence in Vanuatu. The Reserve Bank must be satisfied that:

1. the premises are located at a fixed address in Vanuatu; and

2. the licensee will carry on international banking business under its license from those premises; and

3. the licensee will maintain at those premises operating records including financial statements relating to the international banking business conducted under its license; and

4. the employee or employees of the licensee will operate full time from those premises; and

5. those premises adequately symbolize the physical presence of the licensee in Vanuatu.

All persons seeking approval to become directors, shareholders, managers, officers or controllers of an institution that is licensed or applying to be licensed under the International Banking Act are required, except when exempted by the Governor of the Reserve Bank of Vanuatu, to complete a personal questionnaire. The questionnaire will form part of the basis used by the Reserve Bank in assessing whether a person is “fit and proper” for appointment to the position. top

Banks incorporated in Vanuatu

The application for an International Bank license should be in written format, which addresses Section 8 of the International Banking Act No. 4 of 2002. To assist applicants in preparing their application, the Reserve Bank has advised that the application should address the following items:

1. Ownership, Board and Management

• name of proposed bank;

• a brief history of the applicant and an outline of any existing operations; and key senior management;

• proposed initial capital (authorised, paid up, classes of shares, etc) and capital ratios;

• names of substantial shareholders (direct and ultimate) and their respective shareholdings;

• board structure; including names of directors, their qualifications, principal business associations and detailed curriculum vitae;

• outline of organisational framework, including names and descriptions of the responsibilities of senior management along with their qualifications and curriculum vitae; and

• evidence of the capacity of substantial shareholders to provide additional capital, if necessary, during the initial years of the proposed bank’s operations. Substantial shareholders (including foreign bank parents) should provide a written undertaking to provide any additional capital, if required, and that their involvement in the bank will be more than temporary.

2. Structure of Business

• Outline of proposed activities and scale of operations including details of any specialised services proposed and of any relevant expertise;

• outline of the potential economic benefits to be brought to Vanuatu by the proposed bank;

• details of borrowing and lending activities to be undertaken;

• details of proposed off-balance sheet activities;

• location of head office;

• other intended means of “distribution”;

• estimate of total staff complement envisaged; and

• proposed date for commencement of operations.

3. Prudential Management

• a written undertaking by the applicant that it will adhere to the prudential requirements of the Reserve Bank and will consult with and be guided by the Reserve Bank on prudential matters and in respect of new business initiatives. This undertaking should include a commitment to provide the Reserve Bank with any information which it may require for its prudential supervision of the bank (and its consolidated group).

• in the case of a subsidiary of a foreign bank, an acknowledgement by the applicant that the Reserve Bank may discuss the applicant’s conduct and status with its parent and its parent’s supervisor(s);

• details of the management systems and procedures to be used to control and monitor risks, including:

1. credit policies, including policy on loans to shareholders, directors and associated interests and in respect of exposures to individual clients and groups of related clients;

2. policy on monitoring asset quality, loan grading and providing for doubtful debts;

3. liquidity management, including funding and maturity mismatching;

4. procedures for controlling risk, particularly market risk, in trading activities, including derivatives; and

5. control of operational risk.

• details of information and accounting systems and “back-up” facilities;

• evidence that, from the commencement of operations, information and other systems will be capable of producing all required statutory and prudential returns in an accurate and timely fashion; and

• evidence that arrangements have been established for the prospective bank’s external auditors to report to the Reserve Bank as required.

4. Subsidiaries

• details of existing or proposed subsidiaries and associates; the nature and scale of their business; and their proposed business relationship with the proposed bank; and

5. Financial Projections

• detailed balance sheet and earnings projections (including assumptions) for the proposed bank’s first three years of operations; and

• separate projections for the proposed bank and for the bank and its subsidiaries on a consolidated basis, including key financial and prudential ratios (eg capital ratios, liquidity ratios etc.)

6. Other

• Certificate of incorporation of the corporate vehicle to hold the banking authority;

• Certified copy of Memorandum and Articles of Association;

• external auditor’s certificates verifying the level of capital and capital ratios of the applicant; and

• foreign bank parents should also provide;

1. an outline of the supervisory arrangements which it is subject to in its country of origin;

2. a statement from its home supervisor that: the foreign bank is of good financial standing and has the supervisor’s consent to apply for a banking authority for a locally incorporated subsidiary in Vanuatu; it supervises the parent bank and its subsidiaries on a consolidated basis in accordance with the principles contained in the Basel Concordat; and that it is willing, in terms of the Concordat, to co-operate in the supervision of the subsidiary;

3. an undertaking to keep the Reserve Bank informed of any significant developments adversely affecting its financial soundness and/or reputation globally, and to provide promptly to the Reserve Bank copies of its published financial accounts and any significant media releases (with translations were appropriate);

4. a brief history and an outline of its operations, substantial shareholders (direct and ultimate), directors (including principal business associations);

5. balance sheet, profit and loss and off-balance sheet data for the last three years (plus any available current year data) including information on impaired loans and Basel risk based capital ratios;

6. an undertaking to co-operate in the supervision of its subsidiary, including the provision of information required by the Reserve Bank to assure itself of the prudential standing of the proposed banking subsidiary;

7. an outline of proposed reporting lines from the banking subsidiary to the parent.

An outline of the information required for Applications for a branch of a foreign bank can be obtained from Trustees International Limited at PO Box 240, Port Vila, Vanuatu, Fax (678) 22317, Telephone (678) 22280. top

Cost of Set up and Maintenance

The cost of incorporating an International Bank under this act can be summarised as follows:

 The Reserve Bank’s annual license fee must be paid by 31 January. Both the annual government registration fee and our annual representation fee are payable on 1st April. For the latter fee, a pro-rata credit is given for the first such fee on incorporation. Other costs of incorporating the company, such as preparing and submitting the application for the license and liaising with beneficial owners are charged on a time-spent basis.

Other costs of maintaining the company include accounting and audit fees, services in relation to the company’s operations and the provision of professional advice. These fees, if we are acting in this regard, are also based on the time involved. Our charges range from US$50 to US$320 per hour depending upon the level of skills and care required. A 5% government levy is applied to all time charges. top