Monday, July 25, 2011

Oman’s Anti Money Laundering and Combating Terrorist Financing Law – Part III

Over the past issues of the Client Alert, we have discussed certain provisions of Royal Decree No. 79/2010, Oman’s Anti Money Laundering and Combating Terrorist Financing Law (the “AML-CTFL”), which is designed to combat money-laundering and terrorist financing. In the April issue, we examined what constitutes the offence of money-laundering, how the authorities define ‘proceeds of crime’ and what actions could be deemed to be terrorist financing. In the May issue, we looked at the obligations under the AML-CTFL for all businesses that operate in Oman, financial and non-financial alike, to ensure their compliance with this law. This month, our final installment in this series provides an overview of the penalties which can apply if a business or person is found to have breached the AML-CTFL.


The penalties for breaching the AML-CTFL are severe, and businesses and individuals alike would be well advised to think carefully before engaging in any business which could fall within the scope of this law. Some of the main penalties are as follows.

Firstly, a person who commits or participates in a money laundering crime, or attempts to do so, may be punished (subject to the exceptions below) with imprisonment for a term ranging between three and ten years and with a fine of 5,000 Omani Rials or greater. Notably, there is no upper limit on the fine element of this penalty except that the fine may not exceed the value of the funds which were the subject of the money laundering crime.

We previously established that if a person has information regarding an act of money laundering or terrorist financing (or has reason to suspect that such an act has occurred) and fails to report this to the authorities or informs a person that they are the subject of an investigation under the AML-CTFL and that investigation is harmed by the disclosure, then such failure to disclose or tipping off would be offences under Omani law. Failure to disclose or tipping off are punishable by (subject to the exceptions below) a term of imprisonment of up to three years and a maximum fine of 3,000 Omani Rials.

The public should be aware that the AML-CTFL also states that the disclosure of any procedures, report, analysis or investigation regarding a transaction that involved money laundering or terrorist financing, to the customer, beneficiary or anyone other than the competent authorities, would also constitute an offence under the AML-CTFL. This offence would be punishable by (subject to the exceptions below) a term of imprisonment for at least one year and a fine of up to 10,000 Omani Rials.


The penalties stipulated above can be doubled in the following cases:
• if the crime has been committed in complicity with one or more persons;
• if the offender commits the crime through an organized criminal gang;
• if the crime has been committed as a part of, or in connection with, other criminal activities;
• if the offender has committed the crime in an abuse of his position, e.g., by taking advantage of the powers vested in his office; or
• if the offender is a perpetrator or accomplice in the original crime from which the money laundering funds were obtained.

Conversely, if a perpetrator reports a crime under the AML-CTFL to the authorities and tells the authorities of the parties involved before the authorities had knowledge of the facts, then the reporting perpetrator may be exempted from the penalties stipulated under the AML-CTFL. Even if the report takes place after the authorities were aware of the crime, if it leads to forfeiture of the proceeds of the crime or the arrest of the other perpetrators, then the court may suspend a punishment of imprisonment for the reporting perpetrator.

Terrorist Financing

While some of the penalties above would encompass terrorist financing, there is a specific penalty under the AML-CTFL which relates exclusively to terrorist financing: any person who commits or attempts or participates in terrorist financing may be punished by a minimum term of 10 years imprisonment and a minimum fine of 10,000 Omani Rials. As with the similar money laundering penalty above, the fine element of this punishment has no upper limit other than that it shall not exceed the value of the funds which were the subject of the terrorist financing; this presumably means the money which funded the terrorist financing and not the resulting financial damage which was caused by that terrorism, although the law is not clear on this point.

Business Sanctions

Companies should note that in addition to terms of imprisonment and fines levied, the Omani authorities have the power to impose a number of other business-related sanctions for breaches of the AML-CTFL. These include the annulment of a company’s licence, prohibiting the trade of the company’s securities in the Omani financial markets and, ultimately the power to close the company down.


Thursday, July 21, 2011

Focus on Litigation: Raising Procedural and Substantive Defences

When defending against litigation proceedings in Oman, it is crucial not only to formulate the right defences, but also to deploy them at the right time.

It is a little-known point of Omani law that, in any Omani court litigation, all procedural defences must be stated at the beginning of the very first defence submission.

For example, if the Defendant has an argument that the Oman Courts should decline jurisdiction to hear the dispute, this contention must be explained and detailed in full at the start of the written Defence. The Oman Courts usually reject a procedural argument if it is not raised at the commencement of the case.

Similarly, it is also important to raise substantive defences at the outset of the litigation. If the written Defence does not include substantive (i.e non-procedural) lines of defence, in addition to procedural defences, then there is a risk to the Defendant. Namely, the Oman Courts may reserve the matter for judgment, reject the procedural argument(s) and then state that the defendant has accepted liability for the substantive claim against it by refusing to file any substantive lines of defence.

Accordingly, we habitually advise that a written Defence should always start with procedural defences, and should also include substantive defences as well.


Thursday, July 14, 2011

Islamic Banking in Oman- Part II

Islamic banking is poised to become a key fixture of Oman’s financial sector, following the recent announcement that His Majesty Sultan Qaboos bin Said has approved the formation of Oman’s first Islamic bank. Last month’s Client Alert provided an introduction to the religious, philosophical and economic principles that underpin Islamic finance. This month, we present an overview of some of the classic Islamic banking structures that are commonly used in jurisdictions where Islamic finance is already well established.

Mudaraba (capital provision)

This is an arrangement between an Islamic bank and an entrepreneur in which the bank contributes the capital to fund an entrepreneur’s company, in exchange for a share of the company’s profits. The two most notable features of a mudaraba are that (i) the bank contributes all of the company’s capital, and the entrepreneur contributes his ideas, technical expertise and management skills but no capital, and (ii) the bank and the entrepreneur share the profits of the company according to a pre-agreed scale, while the company’s losses would be absorbed entirely by the bank. A mudaraba structure is well suited to up-and-coming entrepreneurs who possess exceptional business ideas or talents, but lack the financial resources to get their company off the ground.

Musharaka (joint venture)

Under a musharaka, both the Islamic bank and the entrepreneur contribute capital to the entrepreneur’s company. The company’s profits are shared according to a formula that the parties pre-agree, and losses are apportioned pro rata to the parties’ respective capital contributions. Although management of the company may be however the parties agree, it is common for both the entrepreneur and representatives of the bank to be actively involved. A musharaka structure is well suited for an Islamic bank’s proprietary investment activities.

Ijara (lease)

An ijara is a lease structure in which the Islamic bank will buy a specified asset, and lease it to the banking customer at a specified rental price for a specified length of time. It is important for the terms of the lease to be Sharia (Islamic religious law) compliant – for example, not to charge interest or penalties that would be considered usurious and therefore haram (prohibited). Frequently, an ijara will include the option for the customer to purchase the asset at a specified price at the end of the lease period.

Sukuk (Islamic bonds)

Sukuk, or Islamic bonds, are securities representing an ownership interest in an asset or pool of assets. The assets underlying the sukuk will themselves be structured as Sharia-compliant vehicles – such as mudaraba or musharaka. The payments that sukuk bondholders receive are not designated as interest payments, but rather as returns derived from the profits of the business underlying the bonds.


Wednesday, July 6, 2011

Overview of Real Estate Title Insurance

As Oman uses real estate registration systems for the transfer of land titles or interests in them, the Real Estate Register at the Ministry of Housing makes the determination of title ownership and encumbrances on the title based on the registration of various instruments affecting the title. This article provides an overview of real estate title insurance, which is a common feature of many jurisdictions worldwide and represents a potential tool for the Omani authorities to adopt in their continued development and enhancement of the Sultanate’s real estate framework. Title Reports In many jurisdictions, there are title companies that perform the service of reviewing the real estate records on file at the Real Estate Register and issuing a report which identifies the owner and all of the interests and/or agreements that are filed against that property. The fees for the title companies' services are paid by the buyers, usufructuaries and lessees for their services. Prior to the conveyance of title, an attorney for the buyer reviews the title report and advises the buyer of the "condition of title" to the property and whether it complies with the requirements set forth in the contracts between the buyers and sellers. Title Insurance The attorney then gives notice of any title objections to the seller, in order for the seller to cure such defects. At the closing of the conveyance of title, the title company converts the title report into a policy of title insurance, in favor of the buyer, usufructuary (or, as relates to a mortgage, in favor of the lender) which insures that the policy names the correct owner and identifies the agreements that have been filed against the property with the Register. In the case of either corporate ownership or individual ownership, a title company insures that the purchaser owns the property subject only to certain interests which are listed in a "title report". As part of the closing documents, the corporate entity delivers to the title company evidence of the company's organizational documents for the title company to review and determine whether the corporation has the power to own, lease and/or mortgage the property and whether the corporation is then currently in existence in "good standing" ─ i.e., that it has paid all of the corporate taxes and filed all of the required forms and taxes with the appropriate taxing authority. Features of Title Insurance Title insurance provides indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. Title insurance can be purchased to insure any interest in real property. Most institutional lenders would require title insurance to protect their interest in the collateral of loans secured by real estate. The basic elements of insurance provided to the lender cover losses from, inter alia, defects, liens or encumbrances on the title; non-marketability of the real property; invalidity or unenforceability of land rights. Taking account of the growing complexity of real estate transactions in Oman due to the recent surge in ITC and non-ITC real estate developments, the introduction of an appropriate law to allow title insurance would create more security and certainty in the market. Local Associations in Oman A local Omani association is a group, formed in accordance with its bylaws, comprised of a number of individuals with the objective to carry out not-for-profit social, cultural or charity activities and registered with the Ministry of Social Affairs, Labour and Vocational Training (the “Ministry”). Permitted Functions An association may function in the following areas: • welfare of orphans; • welfare of children and adults; • ladies services; • welfare of the aged; • welfare of handicapped persons and persons of special needs; or • any other field or activities which the Minister may deem necessary to incorporate. An association is prohibited from engaging in certain activities including political activities, forming political parties and interfering in religious matters. Foreign associations, local organisations and sports and technical associations and clubs are governed by separate specific laws. Establishing a Local Association To incorporate an association, it must have written bylaws duly signed by at least twenty Omani founding members. The bylaws set out, among other things, the name, objectives, scope of the activities, details of the founding members, conditions governing membership and the financial resources of the association. The founding members must then hold the first general meeting of the association and elect the first board of directors from among themselves for a period of one year. This board then authorises the relevant member to apply for registration of the association with the Ministry. Governance Matters Once registered with the Ministry, the association needs to maintain various books, including a register of members and subscriptions paid, minutes of the meetings of the board of directors and general meeting, and account books at its premises. The Ministry has the right to inspect the registers, books and documents of the association as well as monitor the activities of the association to ensure that they are in conformity with Omani law and the association’s bylaws. All of the members of the association who have followed the bylaws and been a member for at least six months (except for the first general meeting) shall be entitled to attend the general meeting. There is a set procedure which needs to be followed for the calling and holding of ordinary and extraordinary general meetings. Copies of the minutes and any resolution adopted by the general meeting must be provided to the Ministry within fifteen days of the date of each meeting. The board of directors of the association needs to have between five and twelve members, and directors are appointed for two-year terms (except for the first board). The board is responsible for the activities of the association. As mentioned, copies of the minutes and any resolution adopted by the board must be provided to the Ministry within fifteen days of the date of each board meeting. The Ministry has the right to invalidate any board meeting or resolution adopted by the board if convened in breach of Omani law or its bylaws within one month of receiving the relevant documents. In addition, there are further detailed provisions in the law on the financing of associations, merger and dissolution of associations and public service associations, as well as the penalties for non-compliance with such provisions.