Prudential Standard on Related Party Transactions

PRUDENTIAL STANDARD ON RELATED PARTY TRANSACTIONS FOR INSTITUTIONS LICENSED TO CONDUCT BANKING BUSINESS UNDER THE BANKING ACT, 2015 June 2022 EASTERN CARIBBEAN CENTRAL BANK

2  Table of Contents 1 Commencement ................................................................................................................................. 3  2 Definitions ............................................................................................................................................ 3  3 Objectives ............................................................................................................................................. 8  4 Application ........................................................................................................................................... 9  5 Repeal..................................................................................................................................................... 9  6 Prudential Standards ..................................................................................................................... 10  6.1 The General Rule ..................................................................................................................... 10  6.2 Policy Framework ................................................................................................................... 10  6.3 Exempted Transactions ........................................................................................................ 11  6.3.1 Staff Benefits ......................................................................................................................... 11  6.4 Pre- existing Transactions ................................................................................................... 11  6.5 Review of Related Party Transactions ............................................................................ 12  6.6 Reporting Requirements ...................................................................................................... 13  7 Appendices ......................................................................................................................................... 14 

3  Banking Prudential Standard No. 3 of 2022 This Prudential Standard is issued by the Eastern Caribbean Central Bank (Central Bank), in exercise of the powers conferred on it by Section 184 of the Banking Act, No…... of 20151 (hereinafter referred to as the Act). 1 Commencement This standard shall come into effect on 1 November 2022. 2 Definitions The following terms are defined for the purpose of this standard: (a) “‘The Act” refers to the Banking Act 2015. (b) "Affiliate" in relation to a financial institution (F) means: i. a company which is or has at any relevant time been

• a holding company or subsidiary of F;
• a subsidiary of a holding company of F; or
• a holding company of a holding company or a subsidiary of a subsidiary of F; ii. any company over which F has control; iii. any company over which F and any person associated F has control; iv. any company which has common ownership with F; or v. a company which:
• has the same beneficial owner; or                                                              1 Anguilla Banking Act No. 6 of 2015; as amended Antigua and Barbuda Banking Act No. 10 of 2015; as amended Dominica Banking Act No. 4 of 2015; as amended Grenada Banking Act No.20 of 2015; as amended Montserrat Banking Act No. 15 of 2015 as amended Saint Christopher and Nevis Banking Act No. 1 of 2015; Saint Lucia – Banking Act No. 3 of 2015 Saint Vincent and The Grenadines Banking Act No.4 0f 2015

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• shares common management,
• and has any interlinked businesses with F, and “affiliation” shall be construed accordingly. (c) “Banking Act” means the Banking Act in force in that territory2. (d) “Benefit” means an advantage, privilege, profit or gain, whether or not in exchange for consideration. (e) “Central Bank” means the Eastern Caribbean Central Bank established under Article 3 of the Agreement. (f) “Connected person” means where the interests of two or more persons or a group of persons are so interrelated that they could be considered as a single unit or a related party. “Connected person” holds the interpretation as per Section 2(2) of the Banking Act 2015. (g) "Control” means the power of a person, either alone or with an affiliate or relative or connected or other person, directly or indirectly or by an agreement or otherwise to: i. exercise more than twenty per cent of the voting rights at any meeting of shareholders of a licensed financial institution, company or unincorporated body; ii. elect a majority of the directors of a licensed financial institution, company or unincorporated body; or iii. exert influence over the business and affairs of a licensed financial institution, company or unincorporated body; and the terms “controlling interest” and “controlling shareholder” shall be construed accordingly;                                                              2  Banking Act 2015, and subsequent amendments as passed. 

5  (h) “Cross-Director” means a director or an executive manager of an institution who is also part of the board or senior management of another institution, or has such significant links or involvement with the other institution that the director or senior manager could be considered associated with the other institution. (i) “Independent Director” means a non-executive director who is free of any business or other relationships that would materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of his unfettered and rational decision making or independent business judgment pertaining to the institution. (j) “Insider” means any person related to the institution via direct or indirect interaction: i. has information or access to information; ii. knows that he or she has the information, from an inside source; Inside source being either: i. a director, employee or shareholder of the institution; or ii. persons having access to the information by virtue of that individual’s employment, office or profession; (k) "Licensed Financial Institution" means any person or incorporated entity licensed to carry on banking business and includes a former licensed financial institution. (l) “Materiality” refers to the nature, size, complexity and implications of a transaction with a related party. (m) “Non-Executive Director” means a director who does not participate directly in the day-to-day operations and management of the institution. (n) “Non-preferential terms” means made on substantially the same terms,

6  including interest rates and collateral, as applicable and those prevailing from comparable transactions with other persons. (o) “Officer" means: i. a chief executive officer, chief operating officer, president, vice-president, branch manager, country manager, corporate secretary, treasurer, chief financial officer, chief accountant, chief auditor, chief investment officer, chief compliance officer or chief risk officer; ii. any other individual designated as an officer by its articles of incorporation or continuance, bye-laws or other constituent documents, or resolution of the directors or members; or iii. any other individual who performs functions similar to those performed by a person referred to in paragraph (i), whether or not the individual is formally designated as an officer. (p) “related party” includes: i. any financial holding company, subsidiary, or other affiliates of a licensed financial institution, ii. directors, officers, and significant shareholders of a licensed financial institution, financial holding company, subsidiary, or other affiliate of a licensed financial institution, iii. a relative or other members of the households of persons listed in paragraph (p)(ii), iv. any entity that is controlled by a person described in paragraphs (i), (ii) and (iii), or v. any other person or class of persons determined by the Central Bank to be a related party because of its past or present interest in or relationship with the licensed financial institution being such that it can reasonably be expected that this person can influence the decision of the licensed financial institution regarding a transaction.

7  (q) “relative" means a spouse, son, daughter, stepson, stepdaughter, adopted son, adopted daughter, brother, sister, father or mother. (r) “Related Party Transactions” refers to on-balance sheet and off-balance sheet credit exposures and claims, as well as service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowings, and write-offs. (s) “Self-dealing” means any transaction with a related party, that is not on terms and conditions that are the same or similar to that offered to a non-related party and which could generate a lesser return to the institution than with a non-related party. (t) "Significant shareholder" means a person who either alone or with an affiliate or connected person, is entitled to hold more than ten per cent of the shares of the licensed financial institution or to exercise or control more than ten per cent of the total voting rights at any general meeting of the licensed financial institution or another company of which the licensed financial institution is a subsidiary and the terms “significant”, “significant interest” and significant shareholding” shall be construed accordingly; (u) “Spouse” includes:

• a woman who, for a period of not less than five years, has cohabited with a man as if she were in law his wife; and
• a man who, for a period of not less than five years, has cohabited with a woman as if he were in law her husband. (v) “Substantially the same terms and conditions” means: i. in respect of a loan, deposit or other service offered by the institution, terms and conditions that are no more favourable than those offered to the public during the ordinary course of its business; ii. in respect of other transactions, terms and conditions, including those relating

8  to price, rent, or interest rate that might be reasonably expected to apply to similar transactions in an open market, where parties deal on an arm’s length basis, acting knowledgeably and willingly; and iii. the adoption of follow-up, reporting and enforcement actions that might be reasonably expected of a prudent person in a similar situation. (w) “Transaction” means a transfer of benefits, resources, obligations, or the provision of services, regardless of whether a price is charged. 3 Objectives This prudential standard aims to: (a) ensure that transactions with related parties are carried out on terms and conditions that are the same as, or similar to that with a non-related party; (b) establish a reporting requirement for institutions licensed under the Banking Act on related party transactions; (c) support the application of Principle 20 of the Core Principles for Effective Banking Supervision (Basel 2012), which states that: “In order to prevent abuses arising from transactions with related parties and to address the risk of conflict of interest, the supervisor requires banks to enter into any transaction with related parties on an arms-length basis, to monitor these transactions; to take appropriate steps to control or mitigate the risks, and to write off exposures to related parties in accordance with standard policies and procedures.” (d) ensure that related parties of licensees do not benefit inappropriately from transactions with these institutions, usually at the detriment of the institution.

9  4 Application This standard shall apply to all financial institutions licensed under the Act. This standard does not propose to define all the related party transactions that a licensed financial institution (LFI) may be a party to and shall be read in conjunction with the Banking Act and in due consideration of other established standards enforced by the ECCB. Related party transactions as a general rule would include, but not be limited to transactions: • Regarding the issuing of credit, financial leasing, deposits, conditional sales agreements, and service agreements with a related party; • Relating to the acquisition, sale or lease of assets; • Related to the giving of a guarantee on behalf of a related party; • Regarding the purchase of securities from or selling of securities to related party; • Regarding the LFI taking an assignment of or otherwise acquiring a loan made by a third party to a related party; • For professional services rendered to the LFI by a related party; All transactions between an institution and its related parties are subject to this standard, except those specifically exempted in section 6.3 of this standard. 5 Repeal The Guidelines on Related Party Transactions which came into effect on 15 May 2006 are hereby repealed.

10  6 Prudential Standards 6.1 The General Rule All transactions with a related party must be carried out on terms and conditions that are consistent with or are substantially the same as with a non-related party. It is the responsibility of an institution’s board of directors to ensure consistency in the terms and conditions, or substantially the same terms and conditions are applied to all related party transactions. LFIs should therefore establish policy guidelines and review procedures to minimise the potential inconsistencies to these related party transaction standards. Procedures relating to the review of related party transactions are set out in section 6.5 of this standard. 6.2 Policy Framework Institutions should develop and have documented policies/guidelines for the treatment of related party transactions. These policies/guidelines should be in accordance with this standard. The policy should be approved by the board and reviewed at least every three years. Institutions should develop materiality criteria for each type and category of related party transaction. In addition, internal reporting thresholds should be set for each type and category. Related party transaction types and categories are provided in Appendix I. The materiality of an item is usually determined with reference to the nature or size of that transaction. However, the nature of the relationship between the reporting institution, the related party and the nature of the transaction, should also be considered when determining materiality. Institutions should develop approval thresholds for each type and category of related party transaction and a cumulative threshold for all outstanding transactions for a related party. Related party transactions should require board approval before the transaction is executed pursuant to section 50(2)3 of the Banking Act.                                                              3  Section 49(2) of the Anguilla Banking Act 

11  A licensee shall not grant exposure to a related party, where the grant of that particular exposure would result in the total exposures to all related parties exceeding fifty per cent of the LFI’s capital base, as per section 50(4)4 of the Banking Act. In approving a transaction with a related party, the board of directors or a subcommittee thereof, should ensure that the transaction’s terms and conditions comply with this standard and that the transaction will be executed on non-preferential terms, as per sections 50(1) and 50(2) of the Banking Act. Board members with conflicts of interest should be excluded from the approval process of granting and managing related party transactions. 6.3 Exempted Transactions 6.3.1 Staff Benefits Subject to section 51(2)5 of the Banking Act, any benefit or compensation programme provided to an employee by the institution shall only be permitted where it is: i. part of a written employment package or employee benefit plan approved by the board; and ii. in compliance with prudential standards issued by the Central Bank. 6.4 Pre- existing Transactions Within 60 days of this standard coming into effect, or at the end of the next quarterly reporting period, whichever is nearest, each LFI shall submit to the Central Bank, a list of all related party transactions, together with a description of the nature of each transaction, its principal terms and conditions, remaining term to maturity, and the amount outstanding.                                                              4  Section 49(4) of the Anguilla Banking Act  5  Section 50(2) of the Anguilla Banking Act 

12  6.5 Review of Related Party Transactions The board or the audit or compliance committee, as required under the ECCB’s corporate governance standards, shall monitor and review all related party transactions and ensure compliance. All transactions with related parties, should be reviewed at least once per year. The board or the audit or compliance committee may determine that a related party transaction is material even when it is below the threshold, after considering the transaction and the nature of the relationship between the institution and the related party. The audit or compliance committee should identify, document and communicate to the board those transactions below the threshold that are considered material. In carrying out its duties, the board or the audit or compliance committee should have the mandate to: i. Require the management of the institution to establish procedures and information systems to comply with the requirements of these standards and the Banking Act; ii. Ensure that all obligations related to these standards are adhered to; iii. Accept and record declarations of interest submitted by directors to the board of directors as required by section 1106 of the Banking Act; iv. Review all proposed related party transactions that are material as outlined in this standard; v. Review the LFI’s operations and relevant procedures at least once per annum to ensure compliance with this standard; and vi. Review the practices of the L F I to ensure that any transaction with a related                                                              6  Section 109 in the Anguilla Banking Act 

13  party that can have a material effect on its stability and solvency is identified and reviewed in a timely manner. Where a member of the audit or compliance committee is a related party to a transaction submitted to the committee for review, he/she should declare his/her interest and should be excused from participating in the review process. The audit or compliance committee should report on its findings to the board of directors at least quarterly. 6.6 Reporting Requirements The Licensed Financial Institution shall quantify and classify all related party transactions by broad categories or related parties, and report these quarterly to the Central Bank. Refer to Appendix II. All related party transactions should be reported to the ECCB on a quarterly basis. Refer to Appendix III. Related party transactions that were not granted on terms and conditions similar to that provided to a non-related party, should also be reported to the ECCB on a quarterly basis. Refer to Appendix IV. The status of credit facilities to directors and officers should be reported to the ECCB on a quarterly basis. Refer to Appendix V. Within 120 days after the close of the financial year of the institution, the board of directors shall ensure that a report is submitted to the Central Bank, on the performance of the audit or compliance committee in executing its responsibilities under these standards, including the identification of any violations of these standards and corrective measures taken.

14  7 Appendices Appendix I Transaction Types and Categories Related party transaction categories for the purposes of these standards are:

1. Insiders
2. Financial Affiliates
3. Non-Financial affiliates
4. Other Related Parties Consistent with the related party definition in this standard, the constituents of a related party transaction category are: Insiders include items (i) and (v) of the definition of a related party. Financial Affiliates include items (i), (ii), (iv), and (v) as appropriate of the definition of a related party. Other Related Parties include (ii), (iii)and (v) as appropriate of the definition of a related party. It is intended that corporate persons be included only as Financial Affiliates and Non￾Financial Affiliates, and that individuals be included as Insiders and Other Related Parties. Related party transaction types for the purposes of these standards are:

1. Related Party Deposits
2. Related Party Credit
3. Related Party Service Contracts
4. Other Related Party Transactions

15  The “Other Related Party Transactions” section is intended to be a default section, where transactions that do not fall into the first three types would be captured.

16  Appendix II Related Party Transactions Summary

1. OUTSTANDING RELATED PARTY DEPOSITS XXXX a) Insiders xxxx b) Financial Affiliates xxxx c) Non-Financial Affiliates xxxx d) Other Related Parties xxxx
2. OUTSTANDING RELATED PARTY LOANS AND ADVANCES XXXX a) Insiders xxxx b) Financial Affiliates xxxx c) Non-Financial Affiliates xxxx d) Other Related Parties xxxx
3. RELATED PARTY SERVICE CONTRACTS OVER THE QUARTER XXXX Of which continue to remain outstanding xxxx a) Insiders xxxx b) Financial Affiliates xxxx c) Non-Financial Affiliates xxxx d) Other Related Parties xxxx
4. OTHER RELATED PARTY TRANSACTIONS OVER THE QUARTER XXXX Of which continue to remain outstanding xxxx a) Insiders xxxx b) Financial Affiliates xxxx c) Non-Financial Affiliates xxxx d) Other Related Parties xxxx

i  Appendix III Related Party Transactions Complete the following table for each related party transaction approved, that is greater than or which would cause the cumulative value of a related party’s transactions to exceed or continued to exceed 2.0 per cent of the institution’s capital base. CIF #7 Type of Facility Transaction Balance % of Capital Base Terms and Conditions of Facility No. of Days in Arrears Other Facilities at Institution (Y/N)

ii  Appendix IV Related Party Transactions (Exceptions to the General Rule) Complete the following table for each related party transaction that was granted on preferential terms CIF #8 Type of Facility Transaction Balance % of Tier 1 Capital Terms and Conditions of Facility No. of Days in Arrears Other Facilities at Institution (Y/N)

iii  Appendix V Status of Credit Facilities to Directors and Officers Name Position CIF # Account Type Outstanding Balance Days In Arrears Principal in Arrears Interest in Arrears Total Arrears Value of Security Comments

iiii  Made by the Eastern Caribbean Central Bank this 23 day of September 2022. Timothy N.J. Antoine Governor