Circular No. 2010-02 — Rules of Sound and Prudent Management for Trust Companies

Circular No. 2010-02
RULES OF SOUND AND PRUDENT MANAGEMENT
FOR TRUST COMPANIES
(consolidated text as of March 31, 2023 – Update III)

Definitions
For the purposes of this Circular, the following terms are understood as:

• "credit activity": activity defined in Letter B of Annex 1 to Law No. 165 of November 17, 2005;
• "trust activity": activity defined in Letter C of Annex 1 to Law No. 165 of November 17, 2005;
• "securities activity": activity defined in Letter D of Annex 1 to Law No. 165 of November 17, 2005;
• "Central Bank": the Central Bank of the Republic of San Marino;
• "1986 financial laws": Law No. 21 of February 12, 1986 and subsequent amendments, Law No. 24 of February 25, 1986 and subsequent amendments;
• "LISF": Law No. 165 of November 17, 2005 and subsequent amendments;
• "trust companies": companies authorized in San Marino to carry out trust activity;
• "pre-LISF trust companies": banks and financial companies established under the 1986 financial laws, authorized to continue the exercise of trust activity pursuant to Article 156, paragraph 1, of the LISF;
• "post-LISF trust companies": trust companies that will be established pursuant to the LISF or, in any case, in compliance with the specialization obligations introduced by Circular No. 2008-06.

Preamble
Previously, the CENTRAL BANK, and even earlier the Inspectorate for Credit and Currencies, have intervened with their own provisions, including binding ones, regarding the correct and prudent exercise of TRUST ACTIVITY.

In particular, during the biennium 1990/1991, some Uniform Letters were issued introducing prohibitions regarding trust services for the administration (static or "with prior agreement") and management (dynamic or "without prior agreement") of securities portfolios, such as the prohibition of "entering into transactions for amounts exceeding the amount of the portfolio entrusted by the settlor" and of "other procedures that substantially appear incompatible with those typical of securities investment", as well as, more generally, the prohibition of "responding to requests from clients regarding the trust registration of real estate" deemed incompatible "with the nature and functions of Sammarinese intermediaries".

In 2005, the year of the issuance of the LISF, the regulation of TRUST ACTIVITY recorded significant interventions: in particular, a Uniform Letter and a Recommendation, both dated February 7, and a second Recommendation dated May 18 are relevant, which, although within the pre-LISF regulatory framework and thus before the procedures introduced by Articles 38 and 39 of the same law, already anticipated, in terms of purpose and content, this Circular. In particular:

• with the Uniform Letter, a "typification regime" for trust mandates was introduced, delimiting and describing, for each category, their exact scope, and introducing constraints on certain cases considered particularly risky (see trust registration of safety deposit boxes);
• with the Recommendations, trust operators were invited to observe certain prudential conduct rules to contain their legal and reputational risks, prohibiting:
  a) the assumption of testamentary dispositions; b) the mixing, in the same contractual relationship, between trust services and credit services; c) the assumption of risks of non-recovery from the settlor of subsequent tax burdens; d) the intermediation as a direct counterparty of third parties, at the request of the settlor, in the absence of an underlying legal relationship between the trust company and the third party; e) the assumption of loss risks exceeding the capital received from the settlor in trust administration or management, by resorting to financial leverage (see "derivative contracts"); f) the adoption of behaviors, in trust registration relationships of corporate participations, suitable to induce third parties into the erroneous belief that the trust company acts on its own behalf; g) the execution of so-called "franco valuta" (free of payment) operations; h) the assumption of debts towards third parties, in the absence of sufficient pre-established availability from the settlor; i) the trust leasing of safety deposit boxes to be left in the exclusive availability of the settlor or in a non-instrumental/accessory manner with respect to trust relationships of a different nature already existing with the same settlor.

Purpose
The main purpose of this Circular is to update the supervisory rules regarding sound and prudent management in TRUST ACTIVITY to the changes that have occurred in the relevant legislative framework.

In particular, the entry into force of the LISF in 2006 is relevant, with:

• the definition of TRUST ACTIVITY within a new taxonomy in the field of reserved activities;
• the transitional rules that assign to PRE-LISF TRUST COMPANIES exclusively the activities referred to in Article 156, paragraph 1.

Also relevant is Circular No. 2008-06 issued by the CENTRAL BANK on August 8, 2008, which, although relating to structural supervisory rules applicable only to POST-LISF TRUST COMPANIES, introduces certain incompatibilities between reserved activities, describing at the same time, on a doctrinal level, their exact scope and limits of admissibility of their "intersections".

Even more relevant for the purposes of sound and prudent management in the exercise of TRUST ACTIVITY is the new 2008 legislation on the prevention and combating of money laundering and terrorist financing, along with the Decrees and Instructions of the Financial Intelligence Agency, which, especially during 2009, gave concrete implementation to it.

The new "regulatory acquis" therefore makes it necessary to redefine, in a regulatory manner, respecting modern standards of organicity, publicity, and enforceability of supervisory provisions, the safeguards placed on the sound and prudent exercise of TRUST ACTIVITY, confirming, where appropriate, those pre-existing and introducing new ones, also to protect the image and reputation of the entire Sammarinese financial system.

In particular, it is intended to aggregate into a single provision the various dispositions on the correct exercise of TRUST ACTIVITY, contained in circulars, uniform letters, and recommendations issued by the Supervisory Authority in the period prior to the LISF, pursuant to the 1986 FINANCIAL LAWS, as well as to implement its framework in light of subsequent changes in Sammarinese legislation and international relations.

Provisions
Index:

1. Obligation of simplified reclassification of trust mandates and related operational and compilation rules of the Register

2. Prohibition of fictitious intermediation

3. Prohibition of mixing trust activity and payment services

4. Prohibition of mixing trust activity and credit activity

5. Prohibition of executing "franco valuta" operations

6. Prohibition of executing operations with "uncertain foreign tax treatment" or "uncertain definitiveness on a civil law basis" in the absence of adequate risk coverage by the settlor

7. Prohibition of assuming pecuniary obligations with deferred execution without already having sufficient resources pre-established by the settlor for this purpose

8. Prohibition of accepting from the settlor dispositions of a succession nature

9. Prohibition of "direct" trust registration of real estate or registered movable property

10. Prohibition of trust registration of non-financial nature goods and of intermediation in contracts having as object the use of such goods by the settlor

11. Generalized obligation of "contemplatio fiduciae" and consequent behavioral measures

12. Minimal obligations of preventive verification and monitoring on the honorability of settlors

13. Prohibition of accepting mandates conferred by foreign legal entities having their seat in Foreign Countries not equivalent in terms of combating money laundering

14. Prohibition of accepting mandates to be executed in Foreign Countries not collaborative in terms of anti-money laundering or with a legal system not adequately known

15. Obligations of separateness between activities "in own account" and "in third-party account"

16. Obligation of contractual novation in case of modification, even partial, of the settlor part.

17. Obligation of simplified reclassification of trust mandates and related operational and compilation rules of the Register
    Trust mandates must fall into one of the 4 types described below, into which they are conventionally reclassified:

1. trust administration of securities portfolios;
2. trust administration of corporate participations;
3. trust administration of loans to third parties;
4. trust administration of other movable or intangible assets.

a) Type 1 mandates (trust administration of securities portfolios) are those under which the trustee opens, in its own name but for the account, expenses, risk, and interest of the settlor, one or more dedicated accounts, into which the liquidity and financial instruments of the settlor itself flow, which the trustee will administer based on prior written instructions from the settlor. Also subject to Type 1 mandates are accounts opened by the trust company with third-party banks/investment firms, for individual portfolio management, or with management companies, for subscription of shares in common funds, provided that, as clarified by Circular No. 2008-06, the trustee does not assume any management responsibility towards the settlor (so-called dynamic mandate).

b) Type 2 mandates (trust administration of corporate participations) are those under which the trustee acquires/subscribes, for participation purposes, shares or stocks of a specific joint-stock company, in its own name but for the account, expenses, risk, and interest of the settlor, subsequently administering the corporate participation based on prior written instructions from the settlor. Also subject to Type 2 mandates are the sums that the trust company, upon the settlor's funding, disburses to the participating company as a shareholder loan, call for capital contributions, and increase/reconstitution of share capital, as well as those it collects from the participating company as distribution of profits/dividends or reserves, capital reduction, and repayment of shareholder loans, with consequent retrocession to the settlor (respecting the prudential rule in the subsequent provision no. 6).

c) Type 3 mandates (trust administration of loans to third parties) are those under which the trustee, upon the settlor's funding, disburses to a third party – with respect to both the trust company, the settlor, and the already trust-participated companies – in its own name but for the account, expenses, risk, and interest of the settlor, a loan, by cash or signature, but always "with a predetermined maturity", which it will subsequently administer based on the prior written instructions of the settlor, subject, of course, to compliance with mandatory provisions in force regarding the granting of loans, including those on usury and reserve of activity, if carried out in an entrepreneurial form.

d) Type 4 mandates (trust administration of other movable or intangible assets) are those of a "residual" trust administration type, maintaining, both for annotation on the Trust Mandates Register and for periodic reporting, a mandatory taxonomy. These mandates differ from the first 3 types in the object of registration and administration, being goods that do not fall under "financial investments" (Type 1 mandates), nor under "participatory investments" (Type 2 mandates), nor under "credit operations" (Type 3 mandates), although they are equally movable or intangible assets (e.g., credits, trademarks, patents, etc.); no difference is noted in the structure of the trust relationship, as the trust company always acts, as for the other 3 types of mandate, in its own name but for the account, interest, expenses, and risk of the settlor, upon its funding and execution of its prior written instructions.

Any cases of multiple trust intermediation, i.e., a mandate to confer a mandate to another trust company, the trust mandate must be classified in the same type, depending on the nature of the trust-registered asset, which would have been adopted in the absence of the further downstream trust intermediation and in compliance with the same provisions applicable to it for prudential purposes.

Compared to the classification in the Uniform Letter of February 7, 2005, referred to in the Preamble, the following comparisons can be highlighted:

• Type A mandates: reclassified into Type 1 mandates;
• Type B mandates: reclassified into investment services, marked with letter D4 of the LISF and carried out in trust mode as provided by Circular 2008-06;
• Type C mandates: reclassified into Type 2 mandates;
• Type D mandates: reclassified into Type 1 mandates, where compatible with compliance with what is specified below on the prohibition of providing payment services;
• Type E mandates: category suppressed by the repeal of Circular N.18/F by Circ. 2008-06;
• Type F mandates: reclassified into services other than those strictly "trust", lacking a mandate contract without representation which, pursuant to what was subsequently clarified by Letter C of Annex 1 to the LISF, requires the registration of third-party assets (so-called trust intermediation);
• Type G mandates: reclassified into Type 3 mandates and, residually, Type 4, where compatible with compliance with what is specified below on the prohibition of providing payment services and on the prohibition of "fictitious intermediation", i.e., lacking a contractual cause.

Trust contracts in force that cannot be reclassified into any of the new types, or into the investment services referred to in letter D4 of the LISF, carried out in trust mode, must be subject to unilateral renunciation by the TRUST COMPANY within 60 days from the entry into force of this Circular, due to subsequent conflict with binding supervisory provisions.

The keeping of the Register of Trust Mandates, referred to in the aforementioned Uniform Letter, continues to be mandatory under the terms summarized below:
a) in the Register, for each trust mandate contract, the following must be reported:
I. the date of signing of the contract as reported on it;
II. the type to be determined among those described above and strictly listed;
III. the progressive codification, consisting of numerical or alphanumeric characters that identify the contract based on the chosen classification methods;
IV. the date of revocation of the mandate, by the settlor, or of renunciation by the trustee;
b) each contract must be traceable to only one of the aforementioned types, avoiding:
I. allowing the settlor, or the joint settlors, to resort to a single contract where there is no coincidence of object and type;
II. using Type 4, as a residual category, to frame mixed-nature formulas;
c) the Register must be kept orderly, on paper or electronic support, with data consistent with accounting evidence and using the model published on the website of the CENTRAL BANK (www.bcsm.sm); d) the annotations of contracts on the Register must be performed manually, with indelible ink and non-cursive characters, within and no later than the fifth working day following the date of signing; e) any corrections on annotations already entered must be performed using the appropriate space in the margin of the line, thereby avoiding overwriting, erasures, and abrasions on the original text; f) during quarterly checks, the members of the Board of Statutory Auditors, at the end of the control operations on the correct compilation of the Register, will proceed to affix their dated signature at the bottom of the last annotation.

2. Prohibition of fictitious intermediation
   TRUST COMPANIES are prohibited from using their name, or consenting to its use, appearing consequently as the direct counterparty of third parties, different from the settlor, in a fictitious manner, i.e., in the absence of an adequate and provable underlying legal transaction between the TRUST COMPANY itself and the third party. TRUST COMPANIES can, however, proceed with forms of real intermediation, as an ordinary and natural consequence of the execution of mandates without representation.

The prohibition also applies in cases where such fictitious intermediation is requested/authorized in writing by the settlor and/or is aimed at the collection of sums or financial instruments that will be the subject of the mandate or otherwise necessary to execute it, except in cases where the following conditions concur:
a) the third party is a financial undertaking (bank, trust company, investment firm, management company):

• authorized to hold funds on behalf of third parties and consequently subject to legal obligations regarding the prevention and combating of money laundering and terrorist financing;
• with legal seat in San Marino or in Countries or Territories equivalent in terms of money laundering and terrorist financing prevention activities, according to the list drawn up and updated by resolution of the Grand and General Council;
  b) the settlor produces to the trust company a certificate, issued by the financial undertaking referred to in the previous letter a), attesting the effective ownership, by the settlor himself, of the account from which the sums or financial instruments originate or to which they are vice versa destined.

3. Prohibition of mixing trust activity and payment services
   As is known, the provision of payment services, pursuant to the LISF, is reserved for banks.
   Consequently, where the activity carried out by the TRUST COMPANY translates, in its effects, into an surreptitious provision of payment services in favor of the settlor, through real intermediation between the settlor and the bank (or worse, fictitious intermediation between the counterparty of the settlor and the bank), the activity, even if requested by the settlor, must be understood as prohibited.

The prohibition obviously also applies in cases where the payment service is rendered:
a) prior to the endorsement (necessarily "own") by the settlor on abstract credit instruments (then "endorsed for collection" by the trust company to a bank); b) by presenting to the bank a request for the issuance of credit instruments, equally abstract, in favor of third parties other than the settlor; c) by handing over to the settlor credit cards, debit cards, even prepaid, or other electronic payment means capable of direct anonymous use by the settlor or third parties, but registered to the TRUST COMPANY or otherwise requested by it in its own name to the bank.

4. Prohibition of mixing trust activity and credit activity
   As is known, PRE-LISF TRUST COMPANIES are authorized to also carry out CREDIT ACTIVITY as the incompatibilities introduced by Circular 2008-06, pursuant to Article 4 of the LISF, do not affect the transitional regime of Article 156 of the same LISF.

With this in mind, the same prudential reasons that motivated the introduction of the aforementioned incompatibilities motivate the prohibition for these companies to effect mixing between the two different sectors, the credit and the trust sector. In particular, it is prohibited:
a) to use the funds acquired in trust to finance the CREDIT ACTIVITY carried out on its own, i.e., outside of Type 3 mandates, even if a general release is acquired from the settlors; b) to satisfy any credit needs of the settlor, regardless of their nature, duration, and degree of risk, transforming the assets and banking relationships registered to the TRUST COMPANY, by virtue of the mandate without representation contract, into debt positions, thus distorting the relationship (from trust to credit) and creating a dangerous incoherence (under the profile of legal risks) between the content of the contract and the nature of the relationship and the reciprocal obligations arising from it, as well as with the legislative definition of TRUST ACTIVITY which can have as object "assets" and not "debts".

Moreover, if the case referred to in letter a) may highlight elements of relevance also under the criminal profile of the abusive exercise of banking activity, the case referred to in letter b) generates distorting effects under the accounting profile, necessarily bringing "above the line", among its credits (towards the settlor) and debts (towards the third creditor), what, having a trust nature, should remain valued among the "so-called off-balance sheet accounts".

With reference to the customer needs referred to in letter b), PRE-LISF TRUST COMPANIES can, so as not to incur the aforementioned prohibition, operate in one of the following methods described below:
a) pledge the assets, trust-registered, as security for the credit granted by the different financing subject to the settlor, upon written disposition of the latter; b) conclude with the settlor a specific contract of a credit nature, possibly guaranteed, upon written disposition of the settlor, by the trust-registered assets, taking into account the authorization for PRE-LISF TRUST COMPANIES to also carry out CREDIT ACTIVITY.

5. Prohibition of executing "franco valuta" operations
   Both for anti-money laundering purposes and for the purpose of always having useful means of proof in case of litigation, the TRUST COMPANY, with the exception of operations having the settlor itself as counterparty, must always require the channeling through its intermediary of sums paid or collected in execution of the mandate without representation, as the simple attestation of receipt released in its favor by the third party (for payments made directly by the settlor) or by the settlor (for payments made by the counterparty of the trust company directly to the settlor) is not sufficient for this purpose.

6. Prohibition of executing operations with "uncertain foreign tax treatment" or "uncertain definitiveness on a civil law basis" in the absence of adequate risk coverage by the settlor
   TRUST COMPANIES, to protect their patrimonial stability, must refrain from executing in their own name operations with uncertain tax treatment in the foreign country where the related income is intended to be produced, to avoid the risk of inducive tax assessment against them, in a period where

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