Dominican Republic's New Financial Law Makes It Easier For U.S. Banks To Enter Dominican Banking Market

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U.S. banks seeking to expand overseas may be more likely to turn to the Caribbean country of the Dominican Republic, now that it has passed a new banking law.

Located on an island in the Caribbean, the Dominican Republic is a growing destination for U.S. businesses seeking to establish or expand overseas operations. An economically and politically stable country organized as a representative democratic government, the Dominican Republic is the Caribbean's largest democratic country. The Dominican Republic inflation rate is lower, and its growth rate is significantly higher, than other Central and Latin American states. As a result, the Dominican Republic is likely to continue receiving an even greater amount of U.S. -- and international -- investments for the remainder of this decade. Registered foreign investment in the Dominican Republic during 2001 exceeded US$1,200 million -- 25 percent more than in 2000.

Indeed, a recent report by the International Monetary Fund pointed out that "after suffering a decade of economic stagnation in the 1980s, the Dominican Republic took off in the second half of the 1990s and, with output growing at nearly 8 percent a year, became one of the world's fastest growing economies." In the IMF's view, the Dominican Republic "is a textbook case of a small economy with limited natural resources that, by opening itself to trade and financial flows, has been able to turn its economy around."

Reasons For Growth
There are many reasons for this incredible growth. The country has engaged in substantial economic reform, removed many exchange and trade restrictions, and reduced the government's role in the economy. Since the Dominican Republic joined the World Trade Organization in early 1995, it has accelerated changes to the country's legal system with respect to international trade. Both Moody's and Standard & Poor's recently upgraded the country's ratings.

Recently enacted tax incentives, especially in connection with free trade zones, also encourage investment. Moreover, communication within the Dominican Republic -- as well as to and from the country -- is world-class. Dominican corporations, including a Verizon subsidiary and a Motorola joint venture, have made the country a continental leader in this area; its voice, data, and video systems have a quality second only to the quality in the United States and Canada.

The Dominican Republic has an ample labor force, from highly skilled manual workers to sophisticated management and administrative personnel. It should be noted that the country has ratified all international labor conventions, including those relating to discrimination, unions, and child labor. It also participates in international environmental agreements relating to biodiversity, climate change, endangered species, marine dumping, marine life conservation, ozone layer protection, and ship pollution.

The Dominican Republic is a participant in a wide range of multilateral trade agreements, such as the Caribbean Basin Initiative, which was introduced in 1984 to promote trade relations and foreign investment between the Caribbean and the United States. The CBI provides for duty-free import into the U.S. of most manufactured goods and guaranteed access levels for assembled textiles products. The country also enjoys duty-free access to the U.S. markets under the generalized System of Preferences. It participates in the Lomé (now Cotonou) Convention, which opened the door to the European Union market, and other agreements with the Caribbean Islands (CARICOM) and Central America.

New laws -- such as a General Electricity Law, a Fuel Tax Law, and a market values law -- enacted by the Dominican government seek to encourage foreign investment. They have extensively reformed the economy -- and privatized numerous industries.

For example, a foreign investment law, enacted in the mid-1990s, restructured the legal system to make it easier to invest in the Dominican Republic. Among other things, the law opened previously forbidden or restricted areas of the Dominican economy to foreign investment, established uniform treatment of domestic and foreign investors, and eased restrictions on technology transfer agreements.

New Banking Law
Late last year, the Dominican Republic enacted a new banking law that revises the country's monetary and financial system and that eases the way for U.S. banks to enter the Dominican market. Under the new Dominican law, banks and other financial institutions organized pursuant to the legislation of the United States (and other countries), and non-Dominican individuals and corporations, may participate in banking activities within the Dominican Republic by:

acquiring shares of existing Dominican banks and credit institutions; forming new financial institutions; creating an affiliate of an existing bank or credit institution; establishing bank branches organized in accordance with U.S. or other countries' legislation; and opening representative offices.

The law is divided into four separate titles. The first establishes the regulatory and institutional framework. The second relates to the monetary system. The law next deals with regulation of the financial system. Finally, it concludes with transitional provisions and the like.

The Regulatory And Institutional Framework
The system established by the new Dominican law will be familiar to those with knowledge of the American financial regulatory system. The law begins by declaring the regulatory principles of the monetary and financial system. In particular, it provides that the regulation of the monetary and financial system throughout the Dominican Republic will be implemented exclusively by the Monetary and Financial Bureau. The country's monetary and financial system, stock market and insurance and pension systems are governed by their own laws, with the Monetary and Financial Bureau and the supervising and monitoring bodies of the stock market, insurance and pension systems coordinating their actions.

As set forth in the law, the regulation of the country's monetary system has as its objective the maintenance of price stability. Regulation of the financial system is intended to ensure the liquidity, solvency and management of financial services entities to ensure the normal functioning of the system -- a free market system -- within a framework of competitiveness and efficiency.

The Monetary and Financial Bureau is obligated to guarantee the adequate functioning of the monetary and financial system through the implementation of monetary policy, its regulations, and its supervision and control of the operations of financial services entities. Regulatory provisions of the Monetary Board are referred to in the law as "Monetary Regulations" and "Financial Regulations." Regulatory provisions of the Central Bank and the Superintendent of Banks are called "Guidelines." The acts of the Monetary Board are known as "Resolutions of the Monetary Board." The acts of the Central Bank and the Superintendent of Banks are "Circulars."

The new law provides that during the drafting of the Monetary and Financial Regulations, the Monetary Board must request public comment on draft regulations from interested parties, with a comment period generally speaking of not less than 30 days.

Organization Of Monetary And Financial Bureau
The Monetary and Financial Bureau consists of the Monetary Board, the Central Bank and the Superintendent of Banks, with the Monetary Board the higher body of the agencies. The Monetary and Financial Bureau enjoys operational, organizational and budgetary autonomy for the enforcement of the responsibilities entrusted to it by the law.

The staff of the Monetary and Financial Bureau consists of authorities, officials and employees. Authorities are the members of the Monetary Board, as well as the Vice-Governor of the Central Bank and the Assistant to the Superintendent of Banks. Officials are posts similar or higher than the category of deputy director in accordance with the provisions of the Internal Rules of the Central Bank and the Superintendent of Banks. The rest of the staff are employees. The staff members working at the Monetary and Financial Bureau are required to exercise their responsibilities with absolute impartiality. A Code of Conduct is to govern movement of the staff of the Monetary and Financial Bureau from private financial services entities.

There is a selection system for officials and employees of the Monetary and Financial Bureau based on the principles of merit and competence, intended to guarantee its impartiality and independence. Selection of officials and employees for technical/professional tasks is subject to bidding in accordance with the Internal Rules of the Central Bank and the Superintendent of Banks. Officials and employees will be able to count on a transparent and market compensation system. The staff of the Monetary and Financial Bureau who by virtue of their responsibilities have access to information of a privileged and confidential nature are obligated to keep that information confidential.

The Monetary Board
Among other things, the Monetary Board is required to:

determine the country's monetary, exchange and financial policies; approve the country's Monetary Program and monitor its implementation; issue Monetary and Financial Regulations; approve the internal rules of the Central Bank and the Superintendent of Banks, as well as their organizational structures; approve the budgets of the Central Bank and Superintendent of Banks; grant and revoke authorization to operate as a financial services entity, as well as authorize the merger and similar acts between financial services entities as per proposals made by the Superintendent of Banks; appoint, suspend or remove Central Bank and Superintendent of Banks officials as proposed by the Governor and the Superintendent of Banks, as may be appropriate; and appoint the Comptrollers of the Central Bank and Superintendent of Banks.

The Monetary Board consists of three ex officio members and six members appointed for a specific period of time. Members ex officio are: the Governor of the Central Bank, who will chair it, the Secretary of State of Finance and the Superintendent of Banks.

Members for a specific period of time are appointed by the President of the Dominican Republic, for a period of two years, which may be renewable. To become an appointed member for a specific period of time it is necessary for the person to be Dominican, older than 35 years of age, of well-known professional standing, and with more than ten years of proven experience in economic, monetary, financial or entrepreneurial practice, as long as his or her activities do not constitute a conflict of interest with the role that must be performed as a member of the Monetary Board.

The sessions of the Monetary Board are to be convened by its chair, who will determine the agenda, at least once a month, or when at least four members ask for a meeting for good cause.

The Central Bank
The Central Bank is headquartered in Santo Domingo, the capital of the Dominican Republic. It is permitted to establish branches and agencies within or outside of the country. The Central Bank has the function of implementing the country's monetary, exchange and financial policies, in accordance with the Monetary Program approved by the Monetary Board. It is responsible for the supervision and final settlement of payment systems, as well as the interbank market. Another function of the Central Bank is the compilation and development of statistics relating to the balance of payment, the monetary and financial system, and what otherwise may be necessary to enable it to comply with its role.

The Central Bank has internal regulatory power, subject to ratification by the Monetary Board, as well as the authority to develop Guidelines for issues in its area of responsibility. The Central Bank is responsible for the imposition of sanctions on banks that do not meet their reserve requirements. The Central may not guarantee the obligations of others.

As provided in the law, the Central Bank is managed by a Governor, who is responsible for its direction and representation, and an Executive Committee, which advises the Governor. The Executive Committee is formed by the Vice Governor, the Manager and officials who through internal rules will be included on this committee. The organization and distribution of internal responsibilities within the Central Bank, as well as those of the Executive Committee, will be determined through the Central Bank's internal rules.

The Governor of the Central Bank is appointed by the President of the Dominican Republic for a period of two years, which term can be renewed. Those nominated for this post can only be Dominicans, older than 35 years of age, with a university degree, with comprehensive training in monetary and financial subjects and with a sound personal reputation. The Governor can only be dismissed for specific causes, and dismissal must be agreed upon unanimously by the rest of the members of the Monetary Board.

The Vice Governor is appointed by the President of the Dominican Republic, also for a period of two years, which term can be renewed. To be appointed Vice Governor, a person must have performed duties within the Central Bank or the Superintendent of Banks for a period of not less than three years. The Vice Governor is responsible for the following:

substituting for the Governor when the Governor is absent or temporarily disabled; assisting the Governor in connection with matters related to that post; acting as an alternate or substitute Governor representing the Dominican Republic before international organizations in which the country is a member, as long as the representation has been assigned to the Central Bank; attending as the representative of the Governor the sessions of boards or managing bodies when requested by the Governor; assuming, upon request of the Governor, the functions of any official of the Central Bank; carrying out any other function for which responsibility has been assigned by the Monetary Board or the Governor of the Central Bank.

The internal management of the Central Bank is the responsibility of the Manager, who is the chief of personnel of the Central Bank. The Manager, who must be of well-known expertise in banking, is appointed by the Monetary Board according to nominations of the Governor. The Manager is responsible for suggesting to the Governor those modifications that the Manager deems advisable for better organization and functioning of the Central Bank. Likewise, the Manager is responsible for submitting to the Governor periodic information regarding the financial situation of the Central Bank and the efficiency of the staff in fulfilling their duties. The Manager signs the financial statements and exercises the functions assigned to the Manager by the Monetary Board and the Governor of the Central Bank.

There also is a Central Bank Comptroller, who must be an Authorized Public Accountant, an expert with experience in banking management and well-known moral integrity.

The Superintendent Of Banks
The Superintendent of Banks, headquartered in Santo Domingo, is responsible for: implementing, with full operational authority, the supervision of financial brokerage agencies for the purpose of verifying compliance on the part of said institutions with the provisions of the law, applicable regulations, and Guidelines and Circulars; requesting establishment of provisions to cover risks; demanding compliance of legal and regulatory provisions; and imposing sanctions. It also is responsible for the approval or rejection of financial institutions to be evaluated by the Monetary Board and it may propose regulations for the consideration of the

Monetary Board.
The Superintendent of Banks is managed by a Superintendent, who is responsible for the direction and representation of the institution and who has an Executive Committee to advise it, formed by the Assistant to the Superintendent and by the officials included in the committee by the Internal Rules. The Superintendent is appointed by the President of the Dominican Republic for a period of two years, which term can be renewed. A person may be Superintendent only if the person is a Dominican, older than 35 years of age, with a university degree, with comprehensive training in monetary and financial subjects and with a sound personal reputation.

The Assistant to the Superintendent is required to have performed duties within the Central Bank or for the Superintendent of Banks for a period of not less than three years. The Manager is the chief of personnel of the Superintendent of Banks. The Manager, who must be of well-known expertise in banking, is to be appointed by the Monetary Board following nomination by the Superintendent. The Manager is responsible for submitting to the Superintendent periodic information regarding the financial situation of the Superintendent and efficiency of the staff in fulfilling their duties, and manages the Superintendent's operations.

Monetary And Financial Transparency
The new law requires that the following information, among other things, be made available to the public by the Central Bank:

monthly balance sheet of its accounts; annual audited financial statements; a summary of the Monetary Program, including at least the objectives and policies; a quarterly report on the Dominican economy; a summary of the annual report submitted to the President and the National Congress; a newsletter containing the Monetary and Financial Regulations and Central Bank's Guidelines; a newsletter containing the Resolutions issued by the Monetary Board and Central Bank Circulars of general interest; and a quarterly newsletter including main economic, monetary and financial statistics for the Dominican Republic.

Moreover, the law requires that the following information, among other things, is to be made available to the public by the Superintendent of Banks:

1. annual audited financial statements;
2. a summary of the annual report submitted to the President Power and the National Congress; and
3. a newsletter containing Circulars of the Superintendent of Banks which are of general interest.

Regulation Of The Monetary System
Title II of the new law pertains to regulation of the monetary system. It begins by noting that local currency, as defined in the Dominican Republic's Constitution, is the only legal tender with full releasing effect for all private and public obligations throughout the country.

The Central Bank has authority to determine the amount of bills and coins in circulation. It also is required to withdraw from circulation the bills and coins that have deteriorated from use. The Monetary Board will determine the way to destroy bills and coins withdrawn from circulation. It also determines the denominations of bills and coins of legal tender and their characteristics.

The law further provides that the Central Bank will implement monetary policy based on the Monetary Program. This program is required to explicitly state the objectives and goals expected for the period in question, as well as the policy measures and actions that are considered necessary to further those objectives and goals. The Monetary Board is required to approve the Monetary Program, upon proposal of the Central Bank, within 30 days after promulgation of the Income Budget and Public Spending Law of the year corresponding to its implementation and in any case not later than December 31st of each year. The Monetary Program will be reviewed at least on a quarterly basis. The Central Bank will implement the monetary policy using the following market instruments and mechanisms:

Open Market Operations.
The Central Bank may carry out open market operations exclusively with financial broker institutions and institutional investors. Such operations may be carried out, guaranteed or collateralized only with public debt bonds or with bonds issued by the Central Bank. The Central Bank also may issue securities to implement open market operations. When the Central Bank purchases public debt bonds for its open market operations, it generally must do so exclusively in the secondary market with bonds issued at least one year before the operation. Legal Reserve. Financial brokers are subject to legal reserve, which is the obligation to maintain in the Central Bank or wherever the Monetary Board determines, a percentage of the totality of the funds collected from the public through any instrument, whether they are in local or foreign currency. The obligation to maintain reserves may be statutorily extended to other passive, contingent or service operations, if the Monetary Board so decides. Non-compliance with the legal reserve obligation may result in sanctions.

The Central Bank is required to keep an adequate level of international reserves, with the objective of promoting monetary stability and confidence in macroeconomic policies. The Central Bank in its foreign exchange operations may carry out:

Operations Typical of Central Banking.
The Central Bank may obtain and grant financing and carry out operations typical of the nature of central banking, including those relative to placement of funds, in accordance with international agreements and practices, with other central banks, multilateral financial agencies or public or private financial institutions located abroad. Purchase and Sale of Foreign Currency. The Central Bank may buy and sell foreign currency, securities expressed in foreign currency or other assets, under the terms and conditions determined by the Monetary Board, as well as carry out futures and any other operation typical of exchange markets. Correspondent. The Central Bank may act as agent or correspondent of other central banks and of banking and financial located abroad; while at the same time may name such institutions as its agents or correspondents abroad.

Last Resort Moneylender
Under the new law, the Monetary Board is to determine the circumstances under which the Central Bank may grant credit to financial agents with the objective of taking care of temporary liquidity deficiencies that are not caused by problems of financial stability. The amount of credit may be up to one and one half times the paid-in capital of the institution and can be formalized through a guaranteed loan with securities, Central Bank deposits, through the purchase of bonds with a repurchase agreement, or through purchase of low risk portfolio. The value of the collateral cannot be lower than one and one half the amount of the loan. Regulations are to determine the maximum number of credits that may be granted to one institution and the interest rate.

The Central Bank otherwise will not be able to grant direct or indirect financing to financial agents, to other public or private agencies, or individuals, with the exception of loans it could grant as an employer in accordance with its relevant internal rules.

Regulation Of The Financial System
Title III of the new law pertains to the regulation of the Dominican Republic's financial system. The first section relates to "Financial Agents."

Institutions that perform financial brokerage may be publicly or privately owned. In turn, private institutions may be stock or non-stock entities. For the purposes of the new law, all purpose banks and credit institutions are considered stock companies; the latter may be savings and loan banks and credit corporations. Likewise, savings and loan associations and savings and credit cooperatives that perform financial intermediation are non-stock institutions.

Financial agents are subject to the following provisions of the new law:

Prior Authorization. To perform as a financial agent, authorization must be obtained in advance from the Monetary Board. Prior authorization also is mandatory in the case of merger, take-over, conversion of one type of institution to another, and the like. Initial Operating Limitations. The Monetary Board may establish operating limits for new entities regarding opening of branches, maximum organization expenditures, dividends and other aspects to guarantee prudence in the initial expansion of an institution.

With respect to financial brokerage institutions, the law provides as follows:

All Purpose Banks. All purpose banks are those institutions that may attract deposits from the public and perform other types of banking. Credit Institutions. Credit institutions are those whose collections are made through savings and term deposits, subject to the provisions of the Monetary Board conditions agreed upon by the parties. Credit institutions are divided in two categories: savings and credit banks, and credit corporations.

The authorization for all purpose banks and credit institutions to begin operations requires submission to the Monetary Board of an opinion of the Superintendent of Banks, regarding the basis of the documentation filed by the requesting institution, verifying:

that the consolidated equity of requesting shareholders is equal or higher than the amount of minimum capital required for incorporation of the institution; that founding members demonstrate prior experience in financial matters; that no illegal provisions are included in the by-laws and incorporation papers and that they do not in any way seriously damage the rights of minority shareholders; and that they have complied entirely with the requirements provided under the new law, as well as any other provided under relevant general legislation or regulations of the Monetary Board.

All purpose banks and credit institutions must have a minimum paid-in capital determined by the Monetary Board in accordance with its regulations, which can never be lower than RD$90,000,000, in the case of all purpose banks, RD$18,000,000, for savings and credit banks, and RD$5,000,000, for credit corporations, plus the inflation index of each year. Minimum paid-in capital is similar for institutions of the same type and must be represented by common registered shares. The Monetary Board may allow preferred stock as part of the paid-in capital of said institutions.

For the purposes of opening a new institution, documentation to vouch for the veracity and source of the amount invested must be submitted to the Superintendent of Banks. These resources may be used for the acquisition of fixed assets and installation and initial operating expenditures. The by-laws may require a minimum holding of shares to be able to vote in the General Shareholders Meeting, which cannot exceed 0.01 percent of minimum capital stock.

The board of directors or management must consist of a minimum of five individuals. At least 40 percent of the members of a board of directors or managers must be professionals with expertise in financial matters or persons well accredited on economic, financial or entrepreneurial matters.

Foreign Investment
The Monetary Board is to determine by way of regulations the requirements and conditions for banks and other financial institutions organized in accordance with other countries' legislation, so that individuals and corporations located abroad may participate in financial brokerage activities within the Dominican Republic as well as the requirements and conditions that will govern opening of foreign bank representatives.

All purpose banks may carry out the following operations and services:

receive demand deposits in local currency and savings and term deposits in local and foreign currencies; issue titles -- securities; receive loans from financial institutions; issue drafts, payment orders, and transfers against their own offices or correspondent bank, and carry out collections, payments and transfers of funds; grant loans in local and foreign currency, with or without collateral, and grant lines of credit; discount drafts, bills of exchange, notes, and other commercial papers representing supply of credit; acquire, assign, or transfer commercial instruments, titles-securities, and other instruments representative of liabilities, as well as enter into repurchase contracts on same, as may be determined by the Monetary Board through Regulations; issue credit, debit and charge cards in accordance with legal provisions governing the matter; accept, issue, negotiate and confirm letters of credit; assume monetary obligations, grant warranties and guaranties to guarantee compliance of specific liabilities of their customers; accept term drafts resulting from goods and services trade operations; carry out foreign exchange purchase/sales operations; establish correspondent services with banks abroad;. receive into custody securities and goods and offer safe deposit box services; carry out financial leasing operations, invoice discounts, manage automatic tellers; insure housing mortgage loans with the "Seguro de Fomento de Hipotecas Aseguradas (FHA) (Insured Mortgage Development Insurance) issued by the Banco Nacional de la Vivienda (National Housing Bank) as may be statutorily determined by the Monetary Board; serve as originator or securities regulator of credit card and mortgage loan portfolios in the process of securitization; act as manager of a securitized portfolio on account of securities issuers of national origin; serve as third party financial agent. provide counseling services to investment projects. provide technical assistance for economic, administrative and companies' organization and management feasibility studies; and carry out other operations and services demanded by new banking practices in the manner that may be determined by the regulations.

The Monetary Board has the regulatory power to determine the nature of new instruments or operations that may arise as a consequence of new practices and that may be carried out by all purpose banks.

Conclusion
There are other requirements, certainly, before one may open a bank or other financial services institution in the Dominican Republic, and there are other provisions of the new law that affect their operations. But the country's new banking law, together with the substantial other changes in law that have taken place here over the past decade or so, make it clear that the Dominican Republic is eager to have U.S. investment. Now, that investment may take place in the banking industry.