do business in the Dominican Republic - Pellerano & Herrera

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DOING BUSINESS INTHE DOMINICAN REPUBLIC32LAW 92-04 ON BANK RISK PREVENTIONBackgroundThe Monetary and Financial Law No.183-02 was published on 3 December 2002.Its main purpose is to regulate the monetary and financial system of the nation,for which it is necessary to maintain price stability and to ensure that financialentities comply with the minimum liquidity, solvency and administrationrequirements set forth in the law.This with the aim to ensure the normal functioningof the system in an environment of competitiveness, efficiency and freemarket.However, after the collapse of some of the financial entities conforming theDominican bank system, an extraordinary legal framework became necessary inorder to complement Law 183-02 and thus prevent the occurrence, or minimizethe effects, of further similar situations.In this regard, Law 92-04 was published on 4 February 2004, which created theExtraordinary Program of Risk Prevention for Financial Entities.ObjectivesThe main objectives of this statute are to enhance the attributions of theMonetary and Financial Administration, and to see to the compliance of liquidity,solvency and administration requirements by financial entities.To reach its aim, the statute sets forth the Extraordinary Program of RiskPrevention for Financial Entities (hereafter “the Program”) through the creationof a fund to channel public and private contributions. The objective of thisProgram is to protect depositors and to prevent the risk of a system failure,whichmay adversely affect the payment system and the provision of basic financialservices as a whole.Implementation and Functioning of the ProgramIn order to execute the Program, the Central Bank created the Fund for BankConsolidation (hereafter “the Fund”), which has the following purposes: a) bankcapitalization and/or restructuring of assets; b) asset compensation; or, in the lastinstance, c) guarantee of deposits.The Fund shall be managed by the Central Bank and shall be solely used for thepurposes, and according to the procedures, established in the law. It is a separatefund, formed of mandatory contributions of financial entities and other sources,as provided in the law. This Fund shall have a separate accounting and independentlegal personality. It is under the management of a board of directorscomposed of five members appointed on a honorary basis by the MonetaryBoard and governed by the regulations of this Board.The Program may come into application when a financial entity is facing difficulties,whether related to solvency, viability, liquidity or non-compliance byshareholders of capitalization goals within the terms provided in the regulationfor conformation of capital or in its regularization plans.Here, if the Superintendence of Banks considers that there are clear indicators
Pellerano & HerreraAttorneys at law33that the financial system may suffer a negative domino effect because of such difficulties,itshall submit a motivated proposal to the Monetary Board for the applicationof the procedures contained in the Extraordinary Program.This proposalshall include a restructuring plan for the concerned entity, as well as an evaluationof the estimated cost of each alternative.If the Monetary Board approves the proposal, it will issue a motivated resolutionasking the Superintendence of Banks to carry out the necessary precautionarymeasures in order to protect the interests of depositors. Thereafter, theSuperintendence of Banks shall be entitled to exercise all functions, and to adoptor mandate, any actions that it may deem necessary to implement the Program,including the suspension of shareholders and managers rights, removal of managersand adjustment of capital, in accordance with the financial analysis madepursuant to the relevant norms and best international practices.For such a resolution to be put into effect, a positive vote of both the CentralBank Governor and the Minister of Finance is required. Furthermore, thePresident of the Republic should express that he does not object to the measure.In order to ensure that the Program and the Fund may work and operate properly,there is a contribution that all financial entities have to pay. Such contributionsshall be levied on the total amount of deposits received from the publicthrough authorized financial instruments.The minimum annual rate of contributionsis 0.17%, payable quarterly.Potential Effects of Implementationa) Solvency Ratio Higher than Regulatory Minimum. When theSuperintendence of Banks finds that the financial entity has a solvency ratio higherthan the regulatory minimum, it is possible to perform a partial capitalizationwith the resources of the Fund, which shall be used to purchase shares or relateddebt in order to enable the entity to reach the minimum solvency ratio. Forthis, it is required that the managers who may have been performing bad practiceshave left the institution and that the Superintendence of Banks has alreadystarted the relevant investigations in order to determine the eventual civil orcriminal liability of such persons.In any case, the financial entity under the Program must fulfill the followingrequirements:a) To ensure that the loans granted to related persons are not in default and thata reduction calendar is established until the statutory limit has been reached;b) To recognize fully the losses and realize the capital reduction with theresulting effect on the share value of the entity;c) To strengthen the management of the financial entity, including the appointmentby the Fund of the number of members at the Board of Directors of theentity that may be deemed necessary;d) To ensure that the members of the board of directors have the moralstandards and honesty required by the Fund.
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LEGAL FRAMEWORKFOR BUSINESSACTIVITI
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Design: Lourdes Saleme y AsociadosP
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