Criminal Complaints in the Corporate Context

It is a fact of life in Oman that sometimes commercial pressure is brought to bear on a party by the filing of a criminal complaint.

Arabic jurisprudence states that crimes are personal to the perpetrator, so a corporate entity cannot itself be the accused. Instead, the complaint is filed against individuals working for the entity in question. The approach taken by the police and Public Prosecutor is to identify the person or persons closest to the events which have occurred. For instance, when a child was injured in Oman at a playground due to a faulty slide, the criminal investigation was against the maintenance manager of the playground apparatus.

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Anti-Bribery - U.S. FCPA and Omani Law

There has been renewed interest recently in relation to the interpretation and application of the U.S. Foreign Corrupt Practices Act (“FCPA”) due to the issuance on 14 November, 2012, by the U.S. Department of Justice (“DOJ”) and U.S. Securities and Exchange Commission (“SEC”), of a guide entitled “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guide”). The Guide clarifies the U.S. government’s current position on various FCPA-related issues, thereby increasing one’s ability to determine whether FCPA enforcement action is likely in a given situation.

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Islamic Banking Law Decree in the Sultanate of Oman

Introduction

Critical elements in the process of institutional change, even profound change, frequently occur without warning or preparatory fanfare. That has been true with regard to the implementation of Islamic banking in the Sultanate of Oman, as illustrated by the issuance by His Majesty Sultan Qaboos bin Said, on 22nd Muharram 1434 A.H. (6 December 2012 A.D.), of Royal Decree 69/2012, Amending Some Provisions of the Banking Law promulgated by Royal Decree 114/2000 (the “Islamic Banking Decree”). In addition, the Central Bank of Oman (the “CBO”) issued Circular IB 1 on 18 December 2012, which adopted the relevant Islamic banking regulations (the “Islamic Banking Framework”) with only minor amendments to the previously circulated draft. The long-anticipated Royal Decree consists of only three sentences. The amendments to the Banking Law (the “Islamic Banking Law”) are comprised of only 12 sentences set forth in six Articles in one new chapter of the Banking Law (Chapter Six, entitled, quite simply, “Islamic Banking”). The Islamic Banking Framework runs to 589 pages, plus some amendments in Circular IB 1. It is anticipated, however, that the changes effected by the Royal Decree will be significant as the Sultanate embarks upon the age of Islamic banking, finance and investment.

The Islamic Banking Law leaves much to the Islamic Banking Framework and future regulations, circulars and guidelines. But, laying the foundation for the development of the Islamic banking industry in Oman, the Islamic Banking Law does specifically address four critical substantive structural elements, as well as a few procedural elements of the transactional structure of Islamic banking in Oman. This article focuses on those four areas, leaving discussion of the Islamic Banking Framework to future articles.


The four substantive structural elements are: (i) the transactional base of Islamic banking in the Sultanate, and some fundamental requirements pertaining to that transactional base; (ii) the status of Islamic banking and Islamic banking transactions in terms of taxation, land law constraints and the provisions of other areas of substantive law; and (iii) two matters pertaining to Shari’ah supervisory boards, one at the level of the individual banks and one at some higher level.


The procedural matters pertain to: (a) the obligation of the Board of Governors of the CBO (the “Board of Governors”) to issue the Islamic Banking Framework; (b) the obligation of the CBO to license Islamic banks and Islamic windows at conventional banks; and (c) interpretation of the Islamic Banking Law, particularly as its provisions may conflict with other laws, rules, regulations and Royal Decrees. As is so often the case, a great deal of substantive law impact is embedded within the procedural provisions.


Transactional base of Islamic banking


The Islamic Banking Law (specifically Article (124)) is expansive in authorizing Islamic banks to make use of essentially all Shari’ah-complaint contracts and structures in Islamic banking transactions. It mandates that Islamic banks perform those transactions in a manner that does not contradict the Shari’ah (leaving aside for the moment the critical analysis of how the substantive principles of Shari’ah are to be determined and interpreted). By way of example, and not by way of exclusive itemization, Article (124) affords special attention to four types of Shari’a-compliant transactions. Each authorization is gratifyingly broad, and it is likely, in each case, that applicable restrictions will be set forth in the Islamic Banking Framework and future circulars and guidelines. And it is apparent, in each case, that further clarification of the scope of each authorization is necessary. First, Islamic banks are authorized to accept deposits and manage restricted and unrestricted investment accounts, whether those accounts are operating on the basis of charges or profits or otherwise.


Second, Islamic banks are authorized to finance and invest through mudaraba, musharaka, murabaha, ijara, salam, istisna, qard hasan and other Shari’ah-compliant contracts and structures.


Third, Islamic banks are authorized to issue asset-supported or project-supported sukuk and invest in asset-supported and project-supported sukuk. There is no indication of how an Islamic bank might go about issuing an asset-based or project-based sukuk. Presumably, issuance by the bank for its own account and based upon its own assets is permitted.


It would seem that this provision also allows for a broader sukuk issuance authority in order to allow Islamic banks to fulfill the functions of building capital markets and facilitating financing of bank clients. That would likely entail issuances by bank subsidiaries where the subsidiaries are capitalized by assets provided by third-party entities (i.e., customers of the Islamic bank). The use of bank subsidiaries is prudent as a matter of bank regulatory policy and practice; among other reasons: it is undesirable to allow an Islamic bank (or any other bank) to have liability on sukuk structured on the assets or projects of third parties – those liabilities should be isolated into subsidiaries holding those assets or projects. If this bank-subsidiary issuance structure is permissible, the sukuk markets in Oman have been given a major structural boost. And, depending upon the interpretation of the Article (125) tax exemption (discussed in the next section of this article), it seems likely that tax impediments to the use of such structures also have been removed. Thus, for example, it is arguable that the 12% tax that would be levied on a special purpose vehicle (“spv”) established as a sukuk issuer is not applicable if that issuer spv is a subsidiary of an Islamic bank effecting a Shari’ah-compliant banking transaction. Obviously, clarification is needed on these matters, and some clarification may be forthcoming as the Capital Markets Authority considers sukuk regulations for Oman.


Fourth, Islamic banks are authorized to deal in real estate and movables, including by way of selling, purchasing, investing in, renting and leasing real estate and movables, and this authorization is expressly stated to be an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. This is a monumental modification of the laws that goes to the heart of Islamic banking and the use of Shari’ah-compliant structures because essentially all Shari’ah-compliant structures make use of land and movables: the essence of Islamic banking and Islamic finance is the involvement of tangible assets. This provision is discussed in the next section of this article.


Status of Islamic banking transactions: Tax, Land Law, and others


The Islamic Banking Law seems to override a number of Oman’s existing laws, rules and regulations, including, in particular, the Land Law promulgated by Royal Decree 5/80 and tax laws pertaining to land transactions. Clause (D) of Article (124) of the Islamic Banking Law provides that Islamic banks are entitled to deal in real estate and movables, including (without limitation) by way of selling, purchasing, investing in, renting and leasing real estate and movables and that this authorization is an exception to and from restrictions in the laws referenced in the Islamic Banking Decree (presumably the Land Law) and related laws and Royal Decrees. The Article (124) authorization is supplemented by Article (125), which provides that licensed Islamic banks are exempted from charges imposed by transactions related to the ownership, leasing and renting of real estate and movables where the transactions are performed for the purpose of providing Islamic banking services. 

The lists of illustrative activities in Articles (124) and (125) do not match. Article (125) does not include references to ‘selling, investing and other dealings’, while Article (124) does refer to those activities. It is unknown whether this mismatch is intentional. Logic would dictate that ‘selling, investing and other dealings’ in real estate and movables in the course of practicing Islamic banking also should be exempted from charges, particularly in light of the nature of Islamic banking transactions, including with regard to the matters discussed in the next paragraph.


The scope of the exemption from land-related charges is undefined. Certainly it must encompass transfer taxes applicable to interests in land. Hopefully, the provision will be applied in such a manner that Islamic banks will not suffer charges or impositions that would not be incurred by a conventional bank on a similar banking transaction. Some of the more problematic areas of application of the exemption provision will arise in Islamic banking transactions that give rise to accretions or profits that are not incurred in conventional banking transactions. Consider, for example, mudaraba and musharaka arrangements involving interests in land where the transaction results in capital gain on the land interest. It will be necessary to consider, on a charge-by-charge basis, every charge of every type to determine whether it is appropriate to exempt Islamic banking transactions from each of those charges.


The second clause of Article (126) of the Islamic Banking Law provides the customary, but quite important, catch-all statement to the effect that ‘all that contradicts or contravenes the amendments set forth in the Islamic Banking Decree shall be revoked’. This provides comfort that other laws, rules and regulations that interfere with the implementation of Islamic banking in Oman will be removed. Resolution of these conflicts is left to the future. Potential conflicts are many and varied. This article mentions a few, such as taxation on land-related capital gains incurred because of the use of a Shari’ah-compliant structure and, as discussed in the next section, enforcement of determinations of the supreme authority for Shari’ah oversight. But many more can be easily imagined. These include not only charges in the nature of taxes, but also liabilities and impositions that arise because of the use by an Islamic bank of Shari’ah-compliant contracts or structures. Consider, for example, environmental liability or third-party liability arising as a result of the ownership or control of a land interest by a mudaraba or musharaka used by an Islamic bank to provide transactional financing. Will the Islamic bank be exempted from liabilities such as these? Will these types of liabilities be assessed only against the assets involved in the transaction? Or will the Islamic bank itself have liability? Much remains to be determined in the future.


Shari’ah supervisory matters

The Islamic Banking Law requires each institution doing Islamic banking to establish a Shari’ah supervisory board. The form, prerogatives and functioning of these Shari’ah supervisory boards are to be governed by the Islamic Banking Framework, as are the qualifications and conditions applicable to members of the Shari’ah supervisory boards. One of the more interesting features of the Islamic Banking Law as it pertains to Shari’ah supervisory boards is the requirement that the appointment of the board members and the determination of the compensation of board members are to be established by the general meeting of the Islamic bank. No separate provision is made in respect of these matters in the case of Islamic windows of conventional banks, but, presumably, the same concept would apply. Some of these matters were addressed, in part, in one of our previous articles on Islamic finance, which is available on our blog at https://omanlawblog.curtis.com/2012/12/one-of-first-matters-to-be-addressed-as.html.


Article (126) B of the Islamic Banking Law sets forth a requirement that has been described by various market participants as “unexpected”. It requires the Board of Governors to establish a supreme authority for Shari’ah oversight (the “Oman SOA”) and to specify the form, prerogatives and functioning of the Oman SOA as well as the qualifications and conditions applicable to members of the Oman SOA. The Oman SOA has not yet been established, and no guidance has been provided as to the nature of its role, function, power, authority or institutional status. Will the Oman SOA set standards for different contracts and structures (such as mudaraba, musharaka, ijara, murabaha, wakala, and the like) and require that the Shari’ah supervisory boards of the Islamic banks implement transactions in accordance with those standards? Will courts and arbitrators be required to submit Shari’ah matters to the Oman SOA? If any such submission is required, will the determinations of the Oman SOA be advisory in nature or will they constitute binding determinations? No indication has been provided with respect to any of the foregoing questions, or any other similar matter. One may surmise that the pronouncement establishing the Oman SOA will specify its role, function and power and authority, although that pronouncement will likely leave much to future determinations.

The Islamic Banking Law does not make reference to any paradigm or source that might provide guidance in respect of the role, function, power, authority, and institutional status of the Oman SOA. However, one might consider, as a possible paradigm, the central Shari’ah Advisory Council (the “Malaysia SAC”) of Bank Negara Malaysia, the Central Bank of Malaysia (“Bank Negara”). Bank Negara comprised the Malaysia SAC, under the auspices of Bank Negara, in 1997 as the highest Shari’ah authority for Islamic finance in Malaysia. The Malaysia SAC’s authority in its ‘regulatory’ function allows it to ascertain Islamic law for the purposes of Islamic banking, takaful, Islamic finance, Islamic development finance, and other business which is based on Shari’ah principles. The Malaysia SAC also has an advisory function, pursuant to which it is responsible for validating all Islamic banking and takaful products to ensure their compatibility with Shari’ah principles.


The Malaysia SAC was further institutionalized, defined and empowered pursuant to the Central Bank of Malaysia Act 2009, Act 701, Laws of Malaysia (the “CBMA”; available at http://www.bnm.gov.my/documents/act/en_cba.pdf), particularly in respect of its ‘regulatory’ function. Pursuant to the CBMA, Bank Negara is required to consult the Malaysia SAC on any matter relating to Islamic financial business and any matter pertaining to the performance by Bank Negara of its business or affairs or under any law in accordance with the Shari’ah (CBMA, Article 55(1)). Any financial institution may seek a ruling or the advice of the Malaysia SAC in respect of the operations of its business; no provision mandates that the SAC take such a request and render a ruling or advice (CBMA, Article 55(2)). Further, a court or arbitrator in any proceeding in any court or before any arbitrator is required to consider the published rulings of the Malaysia SAC and is required to refer any question concerning a Shari’ah matter to the Malaysia SAC for a ruling or advice (CBMA, Article 56). Articles 57 and 58 of the CBMA provide that the Malaysia SAC determinations in respect of each of the foregoing matters prevails, including over determinations of courts and arbitrators and contrary rulings of other financial institutions and in respect of rulings provided in response to requests made by financial institutions.


The definition of the nature, role, functions, power, authority, and institutional status, among other elements, of the Oman SOA is likely to be one of the most difficult challenges facing the Board of Governors in connection with the design of the Islamic banking model and practical implementation of Islamic banking in Oman. It entails delicate balancing among the CBO, the Oman SOA, the Islamic banks, and the Shari’ah supervisory boards of those Islamic banks. It further entails a careful reconsideration of the relative power, authority and institutional status, with respect to dispute resolution, among the courts and arbitrators, on the one hand, and the Oman SOA, on the other hand. The policy issues are many, and the effect on the existing legal and regulatory system is likely to be profound.


Regulations and licensing

Two Articles of the Islamic Banking Law, constituting a total of two sentences, address obligations in respect of issuance of Islamic banking regulations and the licensing of Islamic banks and Islamic windows of conventional banks. Each of these matters will be discussed in greater detail in future Client Alert articles, particularly those dealing with the Islamic Banking Framework.


Very simply, the Board of Governors is obligated to issue the Islamic banking regulations, as well as circulars and guidelines, in respect of certain enumerated matters and, in open-end format, other non-enumerated matters. As noted above, the CBO issued the Islamic Banking Framework on 18 December 2012 pursuant to Circular IB 1. The enumerated matters are licensing, governance, Shari’ah control, capital, credit, limits of investment and exposure, accountability, reports, disclosure and risk management. This sentence lays the foundation for the Islamic Banking Framework and for a dynamic, ongoing regulatory process that includes regulations, circulars and guidelines in a system that will be familiar to all parties that have banking experience.


With respect to licensing, the CBO is mandated to issue licenses to Islamic banks and Islamic windows of conventional banks. Those matters are addressed in the Islamic Banking Framework with respect to both banking and investment banking activities.


Interpretations of Islamic banking


As noted in other sections of this article, there are significant unresolved questions regarding the interpretation of different provisions of the Islamic Banking Law. These include the scope of taxation exemptions, the scope the revocation of laws, rules and regulations that contradict or contravene the Islamic Banking Law, and the status of the determinations of the Oman SOA vis-à-vis court and arbitrator determinations.


Two provisions of the Islamic Banking Law (Articles (121) and (124)) seem to indicate that whoever interprets the Islamic Banking Law must do so in a manner that does not contradict the essential substantive principles and nature of Islamic banking. A likely interpretation of that mandate is that application and interpretation of the Islamic Banking Law must be in accordance with the substance of the applicable Shari’ah principles. This interpretation gives rise to some delicate policy issues relating to the relative powers, authorities, institutional status, rights, and responsibilities of different branches and organs of government. One will have to consider the Oman SOA as an organ of government for purposes of these policy determinations. For example, the Board of Governors, in the exercise of its Article (126)(B) establishment obligation, may vest the Oman SOA with the ultimate authority to determine the substance of those Shari’ah principles, at least as a primary matter. That would seem to vest exceptional ‘judicial’ or ‘quasi-judicial’ authority in the Oman SOA, and will certainly raise the issue of the balance of power and authority as between the courts and arbitrators and the Oman SOA. In considering the policy arguments, and the inter-branch balancing, it is worth noting that Article (124) seems to indicate that Islamic banks must practice Islamic banking in accordance with the restrictions set by the Board of Governors, even where those restrictions might conflict with interpretations of the regular nature of the applicable Shari’ah principles.


Conclusion


The long-awaited Islamic Banking Decree giving effect to the Islamic Banking Law is now effective. It will result in profound changes in the law of Oman. Over time, it will result in profound changes in the financial markets in Oman. And, over time, it will influence the essence of the Omani culture. The Islamic Banking Law sets forth some elemental principles and the outline of the basic structure of Islamic banking. Much remains to be clarified as the Islamic Banking Law is implemented in the coming months and years. The Islamic Banking Framework, and related circulars and guidelines, will be a first step in resolving some of the many issues. But numerous other matters, some being of a fundamental policy nature, will remain and be resolved incrementally as the Islamic banking system evolves and becomes a part of the fabric of Omani existence. It is our hope that transparent and comprehensive discussions of these issues and these policy matters will accelerate and that the public will be better informed and served as a result.

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Corporate Governance Law Update: Changes to Definition of 'Independent Director'

The Code of Corporate Governance issued by the Capital Market Authority was recently amended to redefine the terms ‘independent director’ and ‘related party’ in public listed companies.

While this amendment largely preserves the definition of ‘related party’ with minor changes, the definition of the ‘independence’ of an independent director has been changed significantly.

The earlier definition of independent director construed the term quite liberally; only persons who had held a senior position in the company during the preceding two years and persons who had entered into financial transactions with the company or its affiliates were excluded from holding the position of ‘independent’ director. Moreover, a 2002 clarification issued by the CMA had also made it possible for shareholders and shareholders’ representatives to become independent directors. This latter step naturally resulted in some tension with the principle of having an independent director on the board to impart an objective and unbiased standpoint without being clouded by real or perceived conflict of interest.

The recent amendment to the Code of Corporate Governance has significantly tightened up the definition of ‘independent director’ with the aim of improving corporate governance and better protecting shareholders’ rights and interests. The new definition requires that an independent director must enjoy complete independence from the company and contains an array of exclusions to prohibit persons with potential vested interests from holding the position of independent director. The new definition of ‘independent director’ excludes, inter alia, (i) shareholders holding more than 10% of the shares of the company or its affiliates and (ii) representatives of a shareholder holding more than 10% of the shares of the company or its affiliates, from holding the position of independent director.

Companies impacted by this amendment would be well advised to seek legal assistance to better understand the implications of the amendment for the composition of their Board of Directors and Audit Committees.

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Legal Opinions in Banking Transactions

A legal opinion is an opinion expressing legal conclusions about and/or legal analysis of a transaction or matter. The main purposes of a legal opinion are:

•  to state conclusions of law as to the ability of a party to enter into and perform its obligations under an agreement; 
• to inform the addressee of the legal opinion of the legal effect of an agreement; and 
• to identify legal risks that the addressee should consider further and evaluate. 

However, a legal opinion is not a substitute for legal advice which, in a transactional context, is likely to be more extensive.

Legal opinions can be given in a variety of circumstances. In a banking transaction, delivery of a legal opinion will often be a condition precedent to, for example, the advance of a loan.

Typical scope 

Although legal opinions will vary in scope they are, in many respects, fairly standard. Typically, they will address issues such as: 

• capacity and authority (for example, that a company is validly existing and has the necessary corporate power to execute and perform the relevant transaction documents to which the opinion relates); 
• legal effect (for example, that the relevant transaction document creates valid, binding and (subject to all necessary qualifications) enforceable obligations); and 
• governing law and jurisdiction (for example, that the law chosen to govern the documents has validly been chosen). 

Typical focus 

Legal opinions are generally required by banks, to reassure them that the legal effect of a lending transaction is as they suppose. Consequently, they will focus on whether the transaction documents: 

• bind the borrower, any third party providers of security and any guarantors (the obligors); and 
• will be enforceable against the obligors. 

Legal opinions will not focus on whether the transaction documents bind and are enforceable against the non-obligor finance parties, such as the banks, any facility agent or any security trustee. This applies regardless of the jurisdiction of incorporation of a finance party. 

In transactions or matters involving only one jurisdiction, the bank may require only one legal opinion, typically an opinion from the lender's lawyers. In some cases, an opinion may be obtained from in-house counsel of the borrower. The advantage of an opinion from in-house counsel is that they may be prepared to cover issues not usually opined on by external lawyers (for example, litigation or non-conflict with obligor's contracts). 

If the transaction involves several jurisdictions, there will usually be a legal opinion from each jurisdiction, for example, the jurisdiction of incorporation of each of the obligors from the obligors’ lawyers and the jurisdiction of the governing law of the transaction documents from the lender’s lawyers.

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Settlement Talks and Negotiations

A little-known fact of Omani law is that the jurisdiction has no concept of “without prejudice” negotiations. Interestingly, despite this fact, lawyers and/or litigants in the Sultanate do sometimes have “off the record” discussions with a view to a possible settlement. This normally happens when there is a high level of trust between the lawyers or litigants in question.

The problem, however, is that either lawyer or litigant could then write to his or her counterpart, thanking the latter for the offer which had been made. This may lead to a scenario where the Omani Courts are asked to infer that an admission of liability has been made.

In other jurisdictions, it is accepted that parties sometimes make a settlement offer even when they believe they are not liable at all. The offer might be made simply to negate the management time and lawyers’ fees otherwise incurred. When offers are made in this way, they are often termed “nuisance value offers”.

For claimants, the position is somewhat easier than for defendants. Under Omani law, the losing party in a court case is unlikely to have to pay more than RO 100 towards the winning party’s legal costs. This means that claimants can claim a large amount and, if their claim fails, they suffer hardly any impact. However, the situation is naturally somewhat different if the defendant files a sizeable counter-claim, because this could lead to the claimant having to pay a large sum to the defendant. 

Claimants can also feel comfortable in Oman sending a letter which contains their time-limited offer to settle. They can write to the counter-party, saying that they have a claim of, say, RO 750,000, but adding that they will accept RO 500,000 provided the latter sum is received within, say, 21 days of the date of the letter. The Claimant will also state in the letter that the time-limited offer constitutes a mere suspension of their full legal rights, and that they will revert to claiming the full RO 750,000 if the RO 500,000 is not paid within the requisite 21 days.

To conclude, extreme care must be taken in Oman as regards settlement talks and negotiations. This is of course especially true when the quantum of the claim is high.

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Branch Offices in Oman - Cancellation of Commercial Registration

Many foreign companies looking to establish a legal presence in Oman to perform a contract with a government entity (or a government controlled entity) will opt for the establishment of a branch office in Oman.

It is important to note that a branch office can only be established if the foreign company has a contract with a government entity (or a government controlled entity). If the foreign company has a contract with a private sector entity, it will not be possible for the foreign company to establish a branch in Oman to perform such contract. Moreover, the foreign company needs to submit a written undertaking confirming that it shall be responsible for any liabilities of the branch office.

The main advantages of establishing a branch office (instead of an Omani company with a local partner) to perform a limited duration government contract are that there is no need for a local partner, there are no minimum capital requirements, the administrative and procedural requirements are minimal, the tax treatment is the same as with respect to other types of legal entities in Oman and a branch is 100 percent owned and managed by the foreign company (since this is basically treated as the Omani office of the foreign company and does not have a separate legal existence).

Since the establishment of a branch office is linked to a contract with a government entity (or a government controlled entity) the tenure of a branch office is also restricted to the terms and duration of the contract. The commercial registration of a branch office may be extended if the contract is extended for further periods or if the foreign company is awarded another government contract for a longer duration.

In this respect, it has been noticed that once the government contract has been duly performed and full payment for the services has been received, the foreign companies will often close the branch office without formally cancelling the registration of the branch at the Ministry of Commerce and Industry. One reason for this practice could be that the commercial registration of the branch is only valid until the date of completion of the contract and once this date has passed the foreign companies do not consider that any additional steps are required to be undertaken.

Although the registration of the branch with the Ministry of Commerce and Industry may already have expired, as a matter of good corporate governance, steps should always be undertaken to ensure that the commercial registration of the branch is formally cancelled at the Ministry of Commerce and Industry.

Moreover, the registration of a branch office with the Ministry of Commerce and Industry also triggers the requirement of registering the branch at the Secretariat General of Taxation at the Ministry of Finance. Accordingly, it is important to ensure that the Secretariat General of Taxation is also informed about the closure of the branch. In fact, a no objection certificate will be required to be given by the Secretariat General of Taxation (addressed to the Ministry of Commerce and Industry) confirming that it has no objection to the cancellation of the commercial registration of the branch and that there are no tax liabilities associated with the branch.

Furthermore, at the time of the registration of the branch, an authorized signatories form is also required to be filed with the Ministry of Commerce and Industry indicating the names, signatures, authority limits and financial powers of the authorized individuals (normally officers of the foreign company). The mere expiry of the branch’s commercial registration does not necessarily mean that the authorized signatories of the branch will not be able to use their powers any more and that the foreign company will no longer be liable for the actions of such authorized signatories.

Therefore, the formal cancellation of the commercial registration of the branch is also important to ensure that there are no continuing (tax or other) liabilities for the foreign parent company (or the individuals who are registered as authorized signatories of the branch) in Oman.

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Islamic Banking: Shari'a Governance

One of the first matters to be addressed as the Sultanate of Oman moves to implement Islamic banking is Shari`a governance within Islamic banking institutions (i.e., full-fledged domestic Islamic banks, Islamic windows of conventional domestic banks and Islamic banking branches of foreign banks, which are referred to as “Licensees”). Shari`a governance is a subset of the general obligations and corporate governance framework and includes a range of topics that are particular to Islamic banking activities.

This article addresses a subset of those Shari`a governance matters, specifically certain matters pertaining to Shari`a supervisory boards (each an “SSB”) and related Shari`a governance entities and mechanisms. These topics are addressed in Title 2 (“Title 2”) of the proposed Islamic Banking Regulatory Framework of the Central Bank of Oman (the “CBO”), Version 2.0, of March 2012 (the “IB Framework”).


As a notable general position, the IB Framework makes reference to, and encourages (but does not seem to mandate) adoption of and adherence to, various guidelines of the Islamic Financial Services Board (“IFSB”). The explicitly referenced IFSB guidelines include the Basic Professional Ethics and Conduct for Members of the Shari 'a Board pursuant to the Guiding Principles on Shari 'a Governance Systems for Institutions Offering Islamic Financial Services (December 2009), the Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial Services (December 2009), and the Guiding Principles on Corporate Governance for Institutions Offering Islamic Financial Services (December 2006).


Under the IB Framework, the required Shari`a governance structure is implemented by mandating each Licensee to (a) provide, in its memorandum and articles of association, for the conduct of its business in accordance with Islamic Shari`a principles, (b) establish and maintain systems and controls to ensure Shari`a compliance of its operations and business activities (in addition to the normal compliance requirements), (c) appoint an SSB to oversee operations from a Shari`a compliance perspective and prepare and present an annual Shari`a compliance report to the Licensee’s Board of Directors, and (d) implement a system of Shari`a governance as specified in Title 2.

The Shari`a governance system is the “hallmark and the differentiating factor for Islamic Banks and Islamic Windows which sets them apart from their conventional counterparts”. Its critical elements are (i) the SSB, (ii) the Internal Shari`a Reviewer, (iii) the Shari`a compliance unit and the Shari`a audit unit. The ultimate responsibility for ensuring Shari`a compliance, and the implementation of the required governance systems, lies with the Licensee’s Board of Directors (“Board”), although both the SSB and management have related responsibilities.

Constitution of SSBs

In other words, the restriction on the employee’s right to compete should be no greater than what is necessary and lawful to protect the employer’s business interests.

Licensees must establish their own independent SSBs, although there is a limited outsourcing exception for small institutions as approved by the CBO. Foreign banks must demonstrate to the CBO that their SSB satisfies the requirements of Title 2.

Each SSB must be comprised of at least three Shari`a scholars, and each scholar must be specialized in fiqh al-mu’amalat (Islamic commercial jurisprudence). An SSB may also include one or more non-voting members who are not specialized in fiqh al-mu’amalat but have expertise in Islamic banking or related areas, such as finance, economics, law, accounting or the like and possess basic knowledge of fiqh al-mu’amalat.Licensees are encourage to the use of Omanis on SSBs and to encourage the development of relevant Shari`a expertise among Omanis. These provisions are supplemented by provisions that allow the SSB to consult with outside experts in appropriate circumstances on a case-by-case basis. As a general admonition, the IB Framework indicates that SSB members should come from diverse backgrounds in terms of areas of expertise, qualifications and experience in order to enhance the depth and breadth of Shari`a deliberations and, additionally, should be familiar with the domestic legal and regulatory environment and sensitivities of the Sultanate of Oman.

The IB Framework contains a number of required qualifications (“fit and proper” standards) for SSB members. Most are stated as general requirements, without specific standards. All members must be of respectable character and be of good conduct, particularly in terms of honesty, integrity and reputation in their professional business and financial dealings. SSB members must be Muslim. It is unclear whether this applies to only Shari`a scholar members or also non-scholar members. The rationale for allowing non-scholar expertise with respect to professional matters to be brought into the SSB on a non-voting basis (as noted below, and subject to the conditions noted below) supports an interpretation that such expertise should be sought at the highest and most refined levels, without regard to affiliation restrictions. This matter will be left to future clarification.

SSB members with a Shari`a background must be holders of academic qualifications in the field of Shari`a (a minimum of a bachelor’s degree) that includes the study of usul al-fiqh and fiqh al-mu’amalat from “a recognized institution” (an undefined phrase). Those members must also demonstrate “an adequate understanding of finance / banking in general and Islamic finance / banking in particular” as well as an understanding of the legal and regulatory frameworks applicable to the functions of the Licensee. Shari`a scholars must have accumulated overall experience of ten years or more (in teaching, research, issuance of fatawa and similar matters). And they must demonstrate a strong proficiency in Arabic. It is also recommended that they have reasonable understanding of English.

SSB members other than Shari`a scholars must be individuals generally recognized for their expertise in their respective field (e.g., banking, finance, economics, law, accounting, etc.). They must hold at least a master’s degree. Non-scholar members must have accumulated relevant experience of 15 years or more in the relevant field. These non-scholar members should demonstrate reasonable proficiency in English, and it is recommended that they have some understanding of Arabic.

The IB Framework provides for disqualification of an individual from SSB participation for a range of “for cause” events, including (a) cessation of good character and reputation or a position of respect among one’s peers, (b) failure to attend a substantial number of meetings without reasonable excuse (currently, 75%), (c) association with any unethical or illegal activity, including contravention of any of the requirements and standards of the financial, banking or corporate regulatory system, (d) conviction of any criminal offense, including financial impropriety or moral turpitude (except misdemeanors), (e) dismissal as an employee or director from any entity on the grounds of fraud, misrepresentation or breach of trust, (f) use of confidential and privileged information about the Licensee or its clients obtained as a result of his position in a manner that is detriment to the competitive interests of the Licensee in the market place (but, apparently, not if otherwise in contravention of confidentiality requirements), or (g) assumption of membership in the SSBs of two or more competing financial institutions in Oman.

With regard to clause (g) of the next preceding paragraph, and as noted above, no SSB member can be on the SSBs of more than one competing institution in Oman. However, an SSB member can be on the SSBs of more than one non-competing institutions. The example provided in the IB Framework is that an Islamic bank SSB member can also sit on the SSB of a takaful company or an Islamic fund management company. However, no SSB member can be on the SSBs of more than four institutions in Oman.

The SSB is appointed by the Licensee’s shareholders upon the recommendation of its Board. The IB Framework does not address situations in which a foreign bank might have a different method of SSB appointment. An SSB member may be appointed for a maximum initial term of three years, and can serve one consecutive renewal term of three years on that SSB.

Roles and Responsibilities of SSBs

The SSB is entrusted with the duty of directing, reviewing and supervising the Licensee’s activities in order to ensure Shari`a compliance. The SSB is obliged to issue fatawa in respect of matters considered by it, which fatawa shall be determined by majority vote of the SSB’s Shari`a scholars and are binding on the Licensee.

The SSB’s scope of work is prepared by the Licensee and approved by its Board and is set forth in a charter. The charter must address a range of matters, including, at a minimum, (a) its purpose, (b) the membership and composition of the SSB, (c) the SSB’s chairperson and secretary, (d) grounds for removal and replacement of SSB members, (e) responsibilities and authority of the SSB, (f) meetings, agenda, quorum, voting, minutes and procedural requirements, and (g) amendment matters.

The responsibilities of the SSB include, without limitation: (i) advising the Board and management on Shari`a matters in the Licensee’s day-to-day business; (ii) review and approve all policies, procedures, products, processes, systems and contracts as to their Shari`a compliance, each to be subsequently ratified by the Board; (iii) review and approve products and related documentation, including structures, contracts, marketing and implementing materials; (iv) performance of follow-up to ensure compliant implementation of products; (v) review and approve Shari`a compliance and Shari`a audit functions; (vi) provision of guidance regarding Shari`a compliance to legal counsel, external auditors and other related parties; (vii) provision of written fatawa on relevant matters brought to it through the Internal Shari`a Reviewer or taken up by the SSB itself; (viii) submission to the Licensee’s Board of an annual Shari`a compliance report that addresses the rather detailed matters, and satisfies the standards (including the detailed opinion standards and requirements), set forth in the IB Framework, and (ix) development and implementation of annual training programs for SSB members regarding deficiencies in knowledge regarding banking, finance, economics or other related disciplines for SSB members with Shari`a background and Shari`a-related knowledge for SSB members who are experts in their respective fields but do not have adequate knowledge of Shari`a.

The report’s opinion paragraph included in its annual report (clause (viii) above) must address a variety of matters as specified in the IB Framework. These include whether the SSB has examined, “to a reasonable extent on a test-case basis, each class of transaction, the relevant documentation and procedures”. As one might expect, the opinion must also state, whether, in the SSB’s opinion, the affairs of the Licensee have been carried out in accordance with the rules and principles of Shari'a, the CBO's regulations and guidelines regarding Shari`a compliance and other rules as well as with specific fatawa and rulings issued by the SSB from time to time. The opinion must also address whether, in the SSB’s opinion, the allocation of funds, weightages, profit sharing ratios, profits and charging of losses (if any) relating to investment accounts conform to the basis given by the SSB in accordance with Shari`a rules and principles and whether there has been income from prohibited sources. Obviously, flesh will be put on these bones in the future.

The SSB is required to define the key elements to be evaluated while reviewing and approving a new product. These key elements establish the basis for developing the relevant product prior to its final presentation to the SSB for approval. Key elements pertain to, at a minimum, essential features of the product, processes, structure, documentation (including legal contracts), risk and compliance considerations, marketing, collateral and other necessary details. New product development must include an opportunity for the expression of views by, among others, internal and external auditors, lawyers and others involved in the process. The SSB will determine a product’s Shari`a compliance in the context of relevant fiqh literature, evidence and reasoning.

The IB Framework requires the SSB to report to the Board, non-compliant activities that it has “reason to believe” [are being] carried out in a systematic manner by the Licensee. If those activities shall continue, the SSB is required to inform the CBO and report such violations in its annual Shari`a compliance report. It is likely that the “reason to believe” and “systematic manner” qualifications will give rise to the need for further clarification in the future.

The SSB is required to issue fatawa and guidelines relating to products and bank functions. These are required to be maintained as central reference tools, be disseminated to Licensee employees, and be published in the annual Shari`a compliance report.

The IB Framework outlines a system for the protection of confidential, privileged and sensitive information made available to the SSB. This information may pertain to, among other matters, new product development and transactions, SSB and management decisions, matters presented to the SSB, discussions and deliberations of the SSB, Licensee client information under the banking laws, and matters so designated by management.

Fiduciary Duty and Conflict of Interest Provisions

A welcome development in the IB Framework, although one likely to give rise to some spirited discussion, relates to the considerable array of provisions that are designed to address fiduciary duties, conflicts of interest and related matters involving SSB members. These are defined as obligations to all of the Licensee and its stakeholders, the general public and the industry. Some of those have been previously discussed and relate to prohibitions on SSB members acting on the Shari`a boards of more than one competing institution or more than four institutions in Oman. Others require fairness, objectivity and independent functioning by the SSB members, in both substance and appearance, free from conflicts of interest, and the members are required to continually assess that status.

In a move toward the development of more stringent professional responsibility standards than are seen in most jurisdictions, the IB Framework addresses situations involving even the appearance of impropriety. For example, SSB members shall not have (a) any relationship with the Licensee that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of a member’s independent judgment when delivering fatawa and rulings or (b) any relationship that “could possibly be seen to interfere or reasonably be perceived to interfere” with the exercise of independent profession judgment. These are strong standards, and constitute a strong move toward a code of professional conduct and professional responsibility for SSB members. It will be interesting to see how these requirements are given definition. Some definition is provided by the IB Framework’s restrictions on employment, board positions, relationships (including those with family members of, and stakeholders of, the Licensee) and managerial and operation responsibilities that are expressly specified. More detail will undoubtedly be forthcoming as the framework is implemented.

The Board is required to undertake annual checks on the independence and conflicts of interest of SSB members as well as their annual performance and report the results to the Central Bank of Oman. The SSB members are made solely and personally responsible for their own work as members of the SSB. Notably, the SSB members are admonished to “appreciate the diversity of opinions among various mainstream schools of thought and differences in expertise among the fellow members” of the SSB.

In the event of an actual or potential issue of independence impairment, SSB members are obligated to document the issue, review and address the issue with the SSB, and, if the issue is unresolved, resign from the SSB and take the issue to the Licensee’s General Assembly. This is yet another step toward a strong professional conduct and responsibility framework. How it will be implemented is yet to be determined.

Management Responsibilities to SSBs

SSB members are required to enable and assist the Licensee’s management by providing advice and guidance regarding Shari`a compliance. Management, on the other hand, is responsible for observing and implementing SSB fatawa, rulings and decisions, and making them available to those who have implementation responsibilities and to other stakeholders. It is obligated, on a timely basis, to disclose information and provide necessary informational access to the SSB through the Internal Shari`a Reviewer (or risk Board penalties). Management is obligated to allocate adequate resources (including people, systems and processes) to support the Shari`a governance framework.

In instances of non-compliance with the Shari`a requirements, the management is obligated to take remedial action, including notification of the Internal Shari`a Reviewer and the SSB, cessation of new business relating to the non-compliance, and acting on the remedial and preventative advice of the Internal Shari`a Reviewer and/or the SSB. These are commendable steps toward strong professional conduct and a professional responsibility system, but these steps leave a broad range of unaddressed questions.

Conclusion

The Shari`a governance system that is to be implemented in the IB Framework is already the subject of considerable, and spirited discussion in the Islamic finance, banking and investment industry. It will certainly evolve as it is given greater form and substance. All are urged to participate in the on-going discussions as this is a fundamental, and forward looking, centerpiece of the Islamic banking governance package that the CBO desires to implement.

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Customs Duty Issues for Businesses

With a flat corporate income tax rate of 12% on annual profits above RO 30,000, and no personal income tax, Oman has a well-deserved reputation as a business-friendly jurisdiction from a tax perspective. Nevertheless, there are a number of tax-related issues that businesses in Oman would do well to heed carefully. Most such tax issues are, of course, best addressed by accountants; however in this month’s client alert we wanted to highlight one tax issue that we sometimes encounter in our legal work: customs duty. 
 
In Oman, customs duty is normally a flat 5% of the value of the goods being imported. For businesses that import significant quantities of goods or high-value goods into Oman, customs duty could add up to a high operational cost and could significantly reduce profit margins. Many companies thus look for ways to reduce their exposure to customs duties. There are three possible ways that companies can do so, which we briefly discuss below.
 
The first – and often best – way for a company to reduce its exposure to customs duty is to arrange, by contract, for its customers to reimburse the company for the Omani customs duty it pays to bring in the goods or equipment necessary to carry out the work for the customer. For example, an oil services company that will provide drilling services for an oilfield customer in Oman, which will require the use of high-value machinery which must be imported into the Sultanate from abroad, could provide in the oil services contract that the customer must reimburse the service provider for any Omani customs duties that the service provider incurs importing the equipment and supplies that are required to carry out the work for the customer.
 
The second way that a company could reduce its customs duty exposure is to secure a temporary duty-free importation permission from the Royal Oman Police Directorate General for Customs. This is a limited category of exemption – it applies only to machinery and heavy equipment to be used for Government or investment projects, it is granted at the discretion of the Royal Oman Police, and most importantly it is valid only for a temporary period (six months at a time, renewable consecutively for a total period up to three years). However, temporary importation can be an attractive option for companies that seek to import high-value equipment into Oman for a brief period of time to carry out a Government or investment project, and will then re-export the equipment out of Oman.

The third route that companies could pursue to reduce their Omani customs duty exposure is to apply for a customs duty exemption pursuant to the Foreign Capital Investment Law. This exemption, which is granted at the discretion of the Ministry of Commerce & Industry and the Ministry of Finance, is not an easy one to secure – it tends to be granted only for key industrial and infrastructure projects for national economic development – however it is an option that companies can pursue. The process to seek this exemption is to first apply to the Ministry of Commerce & Industry, and if the Minister of Commerce approves the application he will forward the application to the Ministry of Finance, which would study the application and make the final determination of whether to grant the customs duty exemption.

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Curtis signs Memorandum of Understanding with Oxford Business Group

Curtis, Mallet-Prevost, Colt and Mosle has signed a Memorandum of Understanding (MOU) with the global publishing, research and consultancy firm Oxford Business Group (OBG) on research facilities to allow OBG access to the firm’s research resources and expertise. Through this partnership, Curtis will provide OBG with the knowledge necessary to complete the legal chapter within The Report: 2013. The Report: Oman 2013 is an in-depth analysis of the changes in Oman’s legal framework, which are pieces of a grander project to attract investors, support the younger generation by creating jobs, and diversify Oman’s economy. The publication, which will be available both online and in print, will be a guide to potential investors and include interviews with economic and business leaders such as Hamood Sangour bin Hashim Al Zadjali, the executive president of the Central Bank of Oman, and Yahya bin Said Al Jabri, chaiman of the Special Economic Zone Authority at Duqm (SEZAD).

The full article covering the MOU can be found in the Times of Oman here: http://www.timesofoman.com/News/Article-1974.aspx

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