On April 1 2008, the Banking Regulatory and Supervision Agency (the BRSA) published the Communiqué on Procedures and Principles related to Activities of Representative Offices Established in Turkey. The Communiqué addressed several questions on the reporting obligations and permissible activities of the representative offices of foreign banks (Rep Offices).
Banking Law 5411 and the Regulation on Transactions Subject to Approval and Indirect Ownership of Banks were amended in April 2008. In general, the Law and the Regulation establish the incorporation process and the scope of activities of representative offices. As an adjunct to the Law and the Regulation, the main principles regarding the operations of the Rep Offices were adopted in accordance with the provisions and instructions of the BRSA.
The BRSA discovered that some foreign banks and financial institutions were ignoring legislative prohibitions and using their Rep Offices to offer banking services in Turkey. In response, the BRSA decided to establish a transparent structure for Rep Offices and to heighten its scrutiny of compliance by issuing the Communiqué.
The BRSA introduced new reporting and notification requirements by the Communiqué; however, it has failed to publish a circular or set of instructions that provide guidance on the fulfilment of the requirements to the Rep Offices.
The Law and the Regulation provide clear guidance on unauthorised activities of Rep Offices. Rep Offices are not entitled to accept deposits or participation funds, extend credit, or conduct other banking activities enumerated in Article 4 of the Law. However, neither the Law nor the Regulation contains provisions identifying permitted activities of Rep Offices. Based on the wording of the legislation, the scope of licences of existing Rep Offices, and the precedents of the BRSA, conducting market research and advertising and promoting the parent bank's business were, prior to the enactment of the Communiqué, considered to be permissible. Such interpretation has, in practice, resulted in controversy among the staff of Rep Offices as to the permissibility of the activities they are engaged in. The Communiqué provides clarification and enumerates the permissible activities of Rep Offices as follows:
- advertise the foreign bank and services provided by this bank;
- strengthen relations of the bank with financial or credit institutions established in Turkey; and,
- conduct market research and report collected information to the bank.
The Communiqué prohibits Rep Offices from engaging in any profit or expense-generating activities. Expenses required for their general and administrative operations are excepted, as are donations. Moreover, a foreign bank or financial institution must not authorise a Rep Office to extend credit or enter into an obligation in its name or on its behalf. Employees of Rep Offices must not access computer systems of its parent bank or of any other bank or financial institution for conducting prohibited activities.
The Communiqué also introduces new notification requirements regarding employees and new accounting reporting obligations.
Although there are no publicly available disclosures of the BRSA based upon the Communiqué, the reporting and notification requirements introduced by the Communiqué demonstrate the BRSA's intent to closely monitor the activities of Rep Offices. Their intention is to gain a better understanding of de lege or de facto activities actually performed and, if necessary, to crack down on unlicenced activities. The BRSA's attempt to scrutinise Rep Offices' factual scope of activities is in line with the BRSA's heightened scrutiny of so-called suitcase banking or active cross-border marketing activities of foreign banks in Turkey.
This primarily involves close monitoring of contacts and personnel of Rep Offices. The Communiqué requires Rep Offices to provide the BRSA with information on a semi-annual basis on their activities, including contacts with real persons and legal entities residing or established in Turkey, and on all visitors from foreign banks or financial institutions, the reasons for their visits and correspondence conducted with these visitors. The Communiqué does not specify the content of the "contacts". The contacts may include meetings in person, telephone conversations, and e-mail correspondence. This raises the obvious question of whether every single contact made by the Rep Office is to be reported to the BRSA. It is noted that all "substantial contacts" are required to be reported to the BRSA, but no definition of that term is provided.
The Communiqué specifically refers to related provisions of the Law which impose administrative and penal sanctions. As a worst-case scenario, the BRSA may temporarily or permanently close the offending business. If any unauthorised deposit or participation fund-taking activity is carried out in violation of the Law, officers of the Rep Offices may be sanctioned by imprisonment from three to five years and assessed a heavy administrative fine. The BRSA is also authorised to notify the competent authorities of the country where the foreign bank is established.
Although it necessitates further clarification, the Communiqué is a significant and crucial step by the BRSA to supervise the activities of Rep Offices established in Turkey. The Communiqué and subsequent regulations will help the BRSA detect whether the Rep Offices are operating in compliance with the banking legislation and within the well-defined scope of permitted activities.