Tue | Jun 15, 2021

Blossom O’Meally-Nelson | Microfinance companies under the microscope: Part 2

Published:Wednesday | June 9, 2021 | 12:05 AM

Under the new microcredit regime, operators of microfinance companies will have to disclose their beneficial ownership.

Anti-money laundering, or AML, rules define beneficial ownership to include any individual who exercises ‘substantial control’ over the company or owns or controls not less than 25 per cent of the company’s ownership interests.

For each beneficial owner, even if they are hidden behind layers of companies, the entity applying to be licensed will have to disclose the full legal name, date of birth, current residential or business address.

It is worthy of note that under United States law, there are a number of exemptions from the requirement to disclose beneficial owners. Entities with this exemption are already subject to disclosure requirements under other acts. Suffice it to say that not disclosing the beneficial ownership of the microfinance company will attract penalties and may result in the revocation of the licence.

Registration under the Microcredit Act will require companies to have a governance structure that is in line with the legal requirements. Directors of the company will have to meet ‘fit and proper’ standards, and not only directors, but senior officers of the company as well. These persons will be held accountable should there be any breach of regulations.

The structure of the board of directors should give assurance to customers that the company has the capacity to effectively manage their operations and hold to the necessary policies and procedures. Microfinance companies will now have to give serious consideration to the composition of their boards of directors and organise for their training in their roles and functions.

Correspondent banks

Microfinance companies are not banks. They do not take deposits or manage investments. Their focus is on lending money and recovering their loans on a timely basis so that they can turn over their portfolios within a stipulated time frame. Microlending is therefore a high-risk activity, and the control of bad debt is the determinant of whether the company will thrive or die.

All microlending financial transactions are carried out through commercial banks, which have rigid know-your-customer, or KYC, requirements. Banks, therefore, have to be confident that the micro operator is compliant with AML/POCA regulations. The problem arises because it now becomes a matter of knowing your customer’s customer; in other words, banks have to be confident that the microfinance company that is their customer is observing adequate customer due diligence procedures.

In maintaining microfinance accounts the banks are taking a risk, and it takes good relationship building to enable banks to be confident that the microfinance company is itself committed to carrying out the necessary due diligence and providing the required documentation.

Commercial banks themselves are under scrutiny from their correspondent banks which they need in order to carry out cross-order transactions. Under the Patriot Act, the United States has the power to issue subpoenas to foreign banks re records relating to any account at that bank. All this as they search for suspicious transactions and non-compliant behaviour.

It is not sufficient for microfinance operators to believe that because their transactions are carried out in Jamaican dollars, KYC rules do not apply, as the heart of the AML thrust is to ensure that loans are not repaid with illegal money. This is why microfinance operators should and do avoid cash transactions, requiring instead that their customers lodge funds to a bank account. But what if the customer has no bank account and is not able to open one?

Consumer and data protection

It is the season of ‘acts’. The Data Protection Act, DPA, was passed in June 2020; it’s intended to safeguard the privacy and personal information of Jamaicans by providing guidelines on how personal data should be collected, stored and used. This is another area where microfinance operators will have to ensure that have the capacity, knowledge and skills within their company to secure personal information.

Under the DPA, consumers have the right to be informed, to have access to their information, to have errors rectified, to restrict processing of their information, to object to steps taken by the lending institution and the right not to be submitted to automated decision-making, including profiling.

The DPA will have an impact on company-customer relations, and gives more power to the Consumer Affairs Commission, which will have oversight of microfinance businesses under the new act.

Microfinance companies are entering into a new era, one that will demand compliance at many levels. Such compliance will be based on knowledge of the various laws which govern financial services and requires the introduction of new policies and systems in their operations.

Some are already well on their way to embracing best practices, others are at the starting line; for all, there is going to be an increase in operating costs. But despite these hurdles, the benefit will come in the long term as operators build stronger, better companies.

Blossom O’Meally-Nelson is chairman of the Jamaica Association for Microfinancing.Email: bomeallynelsonjamfin.cimb@gmail.com Twitter: @MeallyNelson