Circular No. 2010-04 - Rules of Sound and Prudent Management for Trust Companies (Update I to Circular 2010-02)

THE GENERAL MANAGER
OF THE CENTRAL BANK OF THE REPUBLIC OF SAN MARINO

HAVING REGARD TO Article 37 of Law No. 165 of 17 November 2005, which among the objectives of the Supervisory Authority also identifies the protection of the image, reputation, and stability of the financial system, also through the supervision of sound and prudent management by authorized entities;

HAVING REGARD TO Article 39 of Law No. 165 of 17 November 2005, which attributes, among other things, to the Supervisory Authority the power to issue measures containing binding and general provisions for the achievement of its objectives;

HAVING REGARD TO the Statute of the Central Bank of the Republic of San Marino approved by Law No. 96 of 29 June 2005 and in particular Article 30, paragraph 3 of the said Statute, according to which the acts of the Central Bank in matters of supervision, deliberated by the Supervisory Coordination, are issued by the General Manager;

HAVING REGARD TO the resolutions of the Supervisory Coordination and the Board of Directors by which the text of the Circular of the Central Bank of the Republic of San Marino on "Rules of sound and prudent management for trust companies - Update No. I to Circ. 2010-02" was approved;

ISSUES

the attached Circular No. 2010-04 which enters into force on 19 November 2010.

San Marino, 17 November 2010

SIGNED: THE GENERAL MANAGER
Dr. Mario Giannini

Circular No. 2010-04
RULES OF SOUND AND PRUDENT MANAGEMENT
FOR TRUST COMPANIES
(UPDATE NO. I TO CIRC. 2010-02)

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

• "trust activity": activity defined in Letter C of Annex 1 to Law No. 165 of 17 November 2005;
• "Central Bank": the Central Bank of the Republic of San Marino;
• "SPG Circular": Circular No. 2010-02, issued by the Central Bank on 14 July 2010 and entering into force on 30 July 2010.

Preamble
The SPG CIRCULAR represents the first measure of the Central Bank that encompasses, in an organic and substantially exhaustive manner, the binding rules of sound and prudent management to be observed in the exercise of TRUST ACTIVITY. The operational areas affected by the measure are multiple and complex in content, technically speaking, so numerous were the questions to which the Central Bank has provided answers during these first months of application. From some of these, it appeared appropriate to integrate the measure with further specific cases, as well as to provide some clarification in an explicit form. During the same period, significant modifications to the general legislation on companies occurred - most recently with Decree-Law No. 179/2010 - which induce a direct redefinition of the reference for supervisory purposes to the aforementioned legislation contained in provision No. 12, with a consequent deferral of the implementation deadlines.

Objectives
This Circular therefore aims to update, clarify, and integrate the regulatory framework of sound and prudent management for TRUST ACTIVITY, also taking into account the observations and requests received from operators in the sectors during the first months of the validity of the SPG CIRCULAR.
The regulatory technique used for this purpose, in coherence with the objectives of clarity, completeness, and organicity that inspired the SPG CIRCULAR, is that of direct modifying intervention on the previous measure, which thus, in its updated version, will continue to represent the sole source of collection of provisions in force regarding sound and prudent management for trust companies.

Modifying and Integrating Provisions of the SPG Circular
1) The index is replaced by the following:
"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 between trust activity and payment services
4) Prohibition of mixing between trust activity and credit activity
5) Prohibition of executing "foreign currency free" operations
6) Prohibition of executing operations with "uncertain foreign tax treatment" or "uncertain definitiveness in civil law" 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 ownership of real estate or registered movable assets
10) Prohibition of trust ownership of non-financial assets and of intermediation in contracts having as their object the use of such assets by the settlor
11) Generalized obligation of "contemplatio fiduciae" and consequent behavioral measures
12) Minimal obligations of preventive verification and monitoring of 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 anti-money laundering
14) Prohibition of accepting mandates to be executed in Foreign Countries not collaborative in anti-money laundering matters or with a legal system not adequately known
15) Obligations of separateness between activities "in own accounts" and "in third-party accounts"
16) Obligation of contractual novation in case of modification, even partial, of the settlor part."

2) Provision No. 6 is replaced by the following:
"TRUST COMPANIES, to protect their financial 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, in order to avoid the risk of inducive tax assessment against them, in a period where, with the trust relationship likely already extinguished, the right of economic recourse against the settlor is difficult to enforce. To contain the risks of non-recourse mentioned above, without prejudicing the legitimate profit expectations of the settlor, TRUST COMPANIES must subordinate the execution of the operation to the availability of the settlor to submit to prior expert appraisal, in appropriate forms and at their own expense, the appropriateness of the price of the assets, unless this is already available from public quotations of regulated markets. If the TRUST COMPANY, taking into account:
a) the possible difference between the price and the value ascertained by the expert; b) the concrete possibility of recourse, if necessary, on other assets held in trust for the same settlor; c) the concrete possibility of escaping from subsequent tax obligations by transferring them directly to their settlor in the forms of "contemplatio domini" provided for by the applicable legal system; evaluates the risk of non-recourse as real, it must prudently subordinate, for the entire duration of the statute of limitations for any potential tax offense, the retrocession to the settlor of the sums collected to the release, by the latter, of adequate guarantees. Similarly, TRUST COMPANIES must carefully evaluate the risk of non-recourse against their settlor in cases where collections received on their behalf and retroceded to them are revoked (see for example the refund of financing-share by companies in which the trust company holds a participatory interest). The evaluation must take into account:
a) the probability of revocation in light of the economic-financial situation of the counterparty; b) the concrete possibility of recourse, if necessary, on other assets held in trust for the same settlor; c) the concrete possibility of escaping from subsequent civil obligations by transferring them directly to their settlor in the forms of "contemplatio domini" provided for by the applicable legal system. If the TRUST COMPANY evaluates the risk of non-recourse as real, it must prudently subordinate, for the entire duration of the "consolidation" periods, the retrocession to the settlor of the sums collected to the release, by the latter, of adequate guarantees."

3) Provision No. 12 is replaced by the following:
"For all mandates other than those having as their object the trust administration of participations in companies having their seat in the Republic of San Marino (so-called "San Marinese holdings"), for which the provisions of Art. 17 of Law No. 47/2006 and subsequent amendments (so-called Companies Law), Law No. 98/2010 and its Delegated Decrees, in force from time to time, as well as the Circulars of the CENTRAL BANK No. 2007-03 and No. 2008-01 already apply, TRUST COMPANIES must subordinate the acceptance of the assignment and the maintenance of the trust relationship to the existence and persistence on the part of their settlor of the following honorability requirements:
a) not being convicted with a final judgment, to penalties restricting personal liberty for a time exceeding two years for felonies against property, against public faith, against the public economy, or for trafficking in narcotic substances, committed in the last 15 years; b) not being convicted with a final criminal judgment, for corruption, use of invoices for non-existent transactions, tax fraud, usury, fraudulent bankruptcy, money laundering, financing of terrorism, or criminal association of a malicious nature, committed in the last 15 years; In the case of settlors other than natural persons, the honorability requirements must be verified on those who are the beneficial owners and on the person who signs the contract with the TRUST COMPANY. The checks must be carried out by obtaining, in original or certified copy by a San Marinese Public Notary, the General Criminal Record Certificate, or a different equivalent foreign certificate accompanied by a sworn translation. The certificate produced at the initial stage must have been issued no more than 6 months ago. After 3 years from the date of issuance, the certificate is no longer valid for the required purposes and must therefore be previously replaced with a new one. The same certificate is valid for all trust relationships that the TRUST COMPANY maintains, directly or indirectly, with the same client."

4) The following Provision No. 16 is added:
"16) Obligation of contractual novation in case of modification, even partial, of the settlor part In all cases of modification of the composition of the settlor part of the contract (even partial) or of the proportional distribution of shares belonging to each of the settlors (even with the persistence of the above composition), excluding those "mortis causa", the TRUST COMPANY must diligently proceed with the opening of a new contract, progressively coded and annotated in the Register of Trust Mandates, replacing the previous one, which is simultaneously extinguished. In the specific "space for corrections" at the margin of the line of the Register corresponding to the extinguished mandate, a reference to the code assigned to the replacing mandate must be noted. The new contract, even in the absence of consequent obligations towards third parties, must be signed again also by the settlors not affected by modifications to their position, and must be "managed" by the TRUST COMPANY as with any other new mandate, save, of course, for what concerns the mandatory certification of honorability, which, if already assumed and still valid, for those subjects may not need to be renewed. For cases of "mortis causa" succession, save the right for both the TRUST COMPANY, and for each of the heirs of the deceased settlor, and for each of the remaining settlors, to unilaterally withdraw from the contract (resignation or revocation) as a consequence of the event, if this does not occur, the trust mandate contract may remain the same, with the assumption of the honorability certification by the heirs."

5) Letter e) of the Final and Transitional Provisions is replaced as follows:
"e) the certifications referred to in provision No. 12 must be obtained by the settlors by 31 March 2011; in the absence thereof, the TRUST COMPANY must resign from the mandate, as it must also resign where the lack of the honorability requirements described therein emerges;"

San Marino, 17 November 2010.