Circular Letter No. 002-DCC-2020

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CARTA – CIRCULAR N.º 002/DCC/2020
ASSUNTO: Procedimentos para validação e execução de contratos de invisíveis correntes Considerando:

• the revocation of Presidential Decree No. 273/2011, dated October 27, which eliminated the need for contract evaluation by the Evaluation Commission established within the Ministry of Economy;
• the publication of Notice No. 2/2020, dated January 9, regarding the Rules and Procedures for Carrying Out Current Invisible Foreign Exchange Transactions by Legal Entities, which determines exemption from licensing by the Bank of Angola for service provision contracts;
• that contracting services abroad may represent a high risk of foreign exchange fraud and facilitate the illicit movement of funds out of the country;
• that the Bank of Angola has been detecting a high number of contracts suspected of capital flight and foreign exchange fraud;
• the need to ensure the legitimacy of foreign currency transfers abroad and to ensure the adequate use of the country's scarce foreign currency resources;
• the duty of banking financial institutions to validate foreign exchange transactions for payments under service provision contracts in accordance with Notice No. 2/2020, dated January 9;

It is necessary to reinforce the requirement that banking financial institutions conduct a rigorous assessment of their clients' (legal entities) current invisible foreign exchange transactions, considering their responsibility in this matter. In this context, the Bank of Angola, through this Circular Letter, issues guidelines on the aspects that banking financial institutions (hereinafter referred to as banks) must observe when validating payments under service provision contracts or invoices, as applicable, to non-resident entities.

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This circular letter focuses on current invisible transactions encompassing technical and specialized service contracts carried out by non-resident entities, excluding foreign exchange operations related to transport equipment rental, reinsurance, and other similar contracts. Assessment and validation process of the foreign exchange transaction under a service provision contract or invoice, as applicable, considering the value of the service provision, in accordance with Notice No. 2/2020. In fulfilling their validation duty as stipulated in Article 8 of Notice No. 2/2020, dated January 9, regarding the Rules and Procedures for Carrying Out Current Invisible Foreign Exchange Transactions by Legal Entities, banks must consider, in addition to the provisions of said Notice, the following:

1. Customer Due Diligence (Know Your Customer)
   a) The effective assessment of the legitimacy of foreign exchange transactions requested by clients presupposes adequate knowledge of these clients by banks, including:
   i. The activity the company develops in the domestic market and the complexity of its business;
   ii. The size of the business, reflected in financial statements;
   iii. The history of foreign exchange transactions carried out in recent years and their evolution;
   iv. The main counterparties of the foreign exchange transactions and the nature of these counterparties;
   v. The types of services contracted abroad, namely the subject matter of the contracts.
   b) Customer knowledge, particularly regarding companies contracting services abroad, must be supported by the following documentation:
   i. Reliable financial statements, produced through an organized accounting system.
   ii. Confirmation that there are no outstanding taxes.

2. Contracted Services
   a) The contracting of services is limited to specific services, namely technical assistance or specialized services, which are not available in Angola; b) The following are considered:
   i. Technical assistance services - services used to maintain, repair, or install specialized equipment, information system services (hardware and software), telecommunications services, and equivalent services.
   ii. Specialized services - professional services provided by qualified personnel in the legal, medical, engineering, architectural, accounting, training/education fields, and equivalent services.
   c) The contracting of one or more foreign workers through a service provision contract with each of them is not recommended when these workers have an employment relationship with a company that has entered into a service provision contract with the resident foreign exchange entity.

3. Contracting Companies
   a) Contracting companies must have the nature, size, complexity, and activity that justify contracting technical assistance or specialized services abroad; b) The contracting of services abroad must be consistent with the evolution of their business and financial results; c) The contracting of services abroad by companies in the food or other product trading sectors, which do not require technical assistance or specialized professional services, is not recommended; exceptions must be rigorously evaluated by banks to determine their legitimacy.

4. Contracted Entity
   a) The contracted entity, when a legal person, must be a company with proven technical capabilities in the relevant sector and specialty, and an adequate personnel structure to provide the contracted services; b) The contracting of services from unknown, shell, or history-less companies is not recommended; c) Technical assistance or specialized service contracts concluded with natural persons must be supported by the curriculum vitae of the contracted individuals, proving their competence to provide the service.

5. Contracts between Entities of the Same Group
   When the contracted entity is a company within the group of the contracting entity, the latter must be able to prove that the prices charged in the contract are market prices, as follows:
   a) Companies classified as Major Taxpayers must do so by submitting the transfer pricing report to be delivered to the General Tax Authority; b) Companies not covered by the Major Taxpayers regime must do so by presenting, for example, budgets obtained from other recognized companies in the same jurisdiction as the contracted entity and providing the same services.

6. The Contract
   6.1 Subject Matter and Information on Service Provision
   a) The contract must not contain vague, imprecise, or indeterminate subject matters, such as “advising”, “consultancy”, “management”, “marketing”, or “procurement”, among others. b) The contract must include:
   i. A detailed definition of its subject matter, namely a detailed description of the services to be provided and the objective of the services;
   ii. The work program or criteria that trigger service provision, for example, breakdown or periodic maintenance, as applicable;
   iii. The technicians who will provide the services:
   a. Identification of the number of persons and professional profile; b. The working time of each technician, according to the nature of the services to be provided;
   c. The location where service provision will take place.

6.2 Term
The contract term must be consistent with its purpose:
a) When services are provided under a project, the contract term must not exceed the term stipulated for project execution and may not be greater than 24 months; exceeding this initial term or renewing it (permitted once) must be duly justified; b) When dealing with maintenance and repair services, the contract term must not exceed the useful life of the equipment; c) Other contracts, as a rule, must not exceed 24 months, with renewal permitted once, unless an exceptional reason justifies a longer term or other renewals; d) Automatic renewal clauses are prohibited in contracts; e) Contracts must include the possibility of termination with a specified notice period, unless there are justifiable reasons for doing otherwise.

6.3 Value
The contract value must be consistent with its subject matter and service provision:
a) In cases where the contract is triggered by an event, such as a breakdown, the price must be broken down by travel or per day and must contain a maximum value; b) The contract value must be consistent with the size of the contracting entity's activity. c) Prices charged for services must be market prices, so the contracting entity must be able to prove this condition to the bank.

7. Number of Contracts per Contracting Company
   The existence of multiple service provision contracts with the same contracting entity should receive specific analysis regarding the necessity of such a situation.

8. Assessment of Currently Active Contracts
   Banks must conduct an assessment of all active contracts under which payments are being made by their clients, to ensure that these contracts are legitimate and comply with the aforementioned guidelines, and must:
   a) Inform contracting companies about contracts that do not comply with the above provisions, requiring them to regularize their status within 90 days; b) Cease payments under doubtful contracts and proceed in accordance with Article 10 of this Circular Letter. Banks must complete this assessment within 90 days from the publication date of this Circular Letter.

9. Due Diligence and Conclusions
   Banks must:
   i. Obtain all necessary information, including the aforementioned, to ensure the lawfulness of transactions;
   ii. Refuse to carry out transactions whenever the necessary validation procedures cannot be adequately fulfilled;
   iii. Record the results of validations and decisions taken, and file them in the respective client's dossier.

10. Reporting
    In cases where there are indications of foreign exchange fraud, banks must approach the client and request appropriate clarifications.
    If the clarifications are not convincing, and after analysis by the responsible administrator(s), banks must:
    a) Report the detected foreign exchange fraud to the Financial Information Unit; b) Prevent the client from carrying out any foreign exchange transactions and report the situation to the Bank of Angola.

Luanda, August 18, 2020.